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Payday lender settles with North Carolina AG for $825,000
On January 27, the North Carolina attorney general announced that a Florida-based payday lender (lender) agreed to pay $825,000 to settle allegations of usury, lending without a license, unlawful debt collection and unfair and deceptive practices in violation of state consumer protection laws. According to the announcement, though the lender was not licensed in the state, it advanced “more than 400 loans online to financially distressed North Carolina consumers at interest rates between 78 to 252 percent,” which is markedly higher than the state interest rate limit of 30 percent. The AG claimed that the lender tried to skirt North Carolina laws by requiring some borrowers to collect their loan funds outside of the state. The AG also alleged that the lender required borrowers to secure the loans with their vehicle titles, which enabled the lender to repossess and sell the borrowers’ vehicles when they defaulted or were late on payments. In the settlement, without admitting to the AG’s allegations, the lender agreed to return to North Carolina borrowers (i) all fees and interest paid on the loans by the borrowers; (ii) all the auction proceeds exceeding the loan principal to borrowers whose vehicles were repossessed and sold at auction; and (iii) cars owned by borrowers that were repossessed but not sold at auction. Among other things, the lender will also be permanently barred from making loans to, and collecting payments from, North Carolina borrowers, and is prohibited from putting liens on and repossessing vehicles owned by borrowers.
State AGs urge OCC to withdraw Madden proposal
On January 21, a bipartisan collation of attorneys general from 21 states and the District of Columbia, along with the Hawaii Office of Consumer Protection, submitted a comment letter in response to the OCC’s proposed rule to clarify that when a national bank or savings association sells, assigns, or otherwise transfers a loan, the interest permissible prior to the transfer continues to be permissible following the transfer. (See Buckley Special Alert on the proposed rule.) The coalition, led by California, Illinois, and New York, urges the OCC to withdraw the proposed rule. Among their concerns, the AGs argue that the OCC’s proposal conflicts with the National Bank Act and Dodd-Frank, exceeds the OCC’s statutory authority, and is in violation of the Administrative Procedure Act. Specifically, the AGs claim that the proposed rule conflicts with National Bank Act (NBA) provisions that grant benefits of federal preemption only to national banks and no one else. Moreover, the AGs assert that Congress explicitly stated in Dodd-Frank that “that the benefits of federal preemption provided by the NBA accrue only to [n]ational [b]anks,” (emphasis in original) and argue that the proposed rule would contravene “this important limitation” and “cloak non-banks in [the NBA’s] preemptive power.” Moreover, the NBA sections say “nothing about interest chargeable by assignees, transferees, or purchasers of bank loans,” the AGs write.
The AGs also argue that the proposed rule would facilitate predatory “rent-a-bank schemes” by allowing non-bank entities to ignore state interest rate caps and usury laws. “The OCC has not addressed, even summarily, how the [p]roposed [r]ule, if adopted, will serve to incentivize and sanction predatory rent-a-bank schemes,” the AGs state. “This failure to consider the substantial negative consequences this rule would have on consumer financial protection across the country renders the OCC’s [p]roposed [r]ule arbitrary and capricious.” Furthermore, the AGs contend that the OCC’s proposed rule contains no factual findings or reasoned analysis to support its proposal to extend NBA preemption to all non-bank entities that purchase loans from national banks. “[T]his is beyond the agency’s power,” the AGs argue, asserting that “[t]he OCC simply ‘may not rewrite clear statutory terms to suit its own sense of how the statute should operate.’”
District Court settles payday lending suit against investment firm in rent-a-tribe scheme
On December 31, the U.S. District Court for the Eastern District of Pennsylvania entered an order signing off on a settlement agreement between the state attorney general and an investment firm and its affiliates (the defendants) connected to a lender accused of using Native American tribes to circumvent the state’s usury laws. (See previous InfoBytes coverage here and here.) According to the court’s opinion, the defendants allegedly became involved in the “rent-a-bank” and “rent-a-tribe” schemes when they made “‘an initial commitment of at least $90 million to be used in funding [the] loans’ in exchange for a fixed 20 percent return on investment” guaranteed by the lender.
In the settlement agreement, the defendants agreed not to provide capital to any third-parties offering Pennsylvania consumers loans that carry an interest rate in excess of the state’s six percent limit on unsecured consumer loans under $50,000. The defendants also agreed to perform regulatory reviews and due diligence “at least once per full calendar year during the term of [a] transaction” involving consumer credit products or services offered to Pennsylvania consumers. While the defendants expressly deny any liability or wrongdoing, the parties agreed to enter into the agreement to “avoid the cost, expense and effort associated with continuing the dispute.” The AG states that the settlement agreement does not constitute an approval by the AG’s office of any of the defendants’ “products, marketing, business practices or website content, acts and/or practices.”Payday lenders’ $12 million settlement approved
On December 13, the U.S. District Court for the Eastern District of Virginia granted final approval of a $12 million settlement to resolve allegations including unjust enrichment, usury, and violations of RICO against tribe-related lenders (lenders) that plaintiffs claim charged extremely high interest rates on consumer payday loans. According to the memorandum in support of the settlement, one lender’s “operation constituted a “rent-a-tribe,” where it originated high-interest loans through entities formed under tribal law in an attempt to evade state and federal laws.” The parties filed a preliminary settlement agreement in June. According to the approval order, the court found that “the settlement agreement is fair, adequate and reasonable,” reaffirmed certification of a final settlement class, and additionally found that “the class representatives have and continue to adequately represent settlement class members.” This settlement ends three separate putative class actions against the lenders.
Senate Democrats criticize OCC and FDIC fintech proposals
On November 21, six Democratic Senators wrote to OCC Comptroller Joseph Otting and FDIC Chairman Jelena Williams to strongly oppose recent proposed rules by the agencies (see OCC notice here and FDIC notice here). As previously covered by a Buckley Special Alert, the OCC and FDIC proposed rules reassert the “valid-when-made doctrine,” which states that loan interest that is permissible when the loan is made to a bank remains permissible after the loan is transferred to a nonbank. In the letter, the Senators suggest that the proposed rules enable non-bank lenders to avoid state interest rate limits. According to the letter, the proposed rules would encourage “payday and other non-bank lenders to launder their loans through banks so that they can charge whatever interest rate federally-regulated banks may charge.” Additionally, the letter urges both agencies to consider their past declarations against “rent-a-bank” schemes, and contends that the agencies should not attempt to address Madden v. Midland Funding, LLC, which rejected the valid-when-made doctrine, through rulemaking, but should instead leave such lawmaking to Congress.
Special Alert: OCC and FDIC propose rules to override Madden
On November 18, 2019 the Office of the Comptroller of the Currency (“OCC”) issued a proposed rule to clarify that when a national bank or savings association sells, assigns, or otherwise transfers a loan, the interest permissible prior to the transfer continues to be permissible following the transfer. The very next day, the Federal Deposit Insurance Corporation (“FDIC”) followed suit with respect to state chartered banks. The proposals are intended to address problems created by the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, a decision that cast doubt, at least in the Second Circuit states, about the effect of a transfer or assignment on a bank loan’s stated interest rate that was nonusurious when made. Comments on these proposals are due 60 days following publication in the Federal Register, and as noted below, the case for robust banking industry comment is more compelling than is typically the case.
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Click here to read the full special alert.
If you have any questions about the alert or other related issues, please visit our Fintech practice page or contact a Buckley attorney with whom you have worked in the past.District Court certifies payday lending class action
On October 31, the U.S. District Court for the District of New Jersey certified two classes of consumers alleging a payday lender and its subsidiaries charged usurious, triple-digit interest rates on short-term loans originated by a nonparty entity run by a member of a federally recognized Indian tribe. The lawsuit—which alleges, among other things, usury and consumer fraud in violation of New Jersey law, common law restitution and unjust enrichment, and violations of the Racketeer Influenced and Corrupt Organizations Act—was filed in 2016 with the defendants arguing that the claims were subject to an arbitration provision accompanying the loan agreement. However, as previously covered by InfoBytes, the U.S. Court of Appeals for the Third Circuit upheld the district court’s decision that the tribal arbitration forum referenced in the loan agreement does not actually exist and, “because the loan agreement’s forum selection clause is an integral, non-severable part of the arbitration agreement,” the entire arbitration agreement is unenforceable.
According to the plaintiffs, the defendants evaded state law usury limits by attempting to use the sovereignty of an Indian tribe, with most loans carrying an annual percentage interest rate of 139 percent. While the defendants challenged the notion that common questions about the loan agreements predominated over the individual concerns of each class member, the court determined that the loan agreements at issue have an identical structure of interest amortized over a fixed payment schedule. “Plaintiffs have therefore shown that they can use common evidence to prove their [Consumer Fraud Act] claims, and that common questions predominate,” the court stated. “Namely the nearly identical, allegedly usurious loan agreements, which caused an out of pocket loss in the form of usurious interest.” The court also dismissed the defendants’ argument that the plaintiffs’ suit was inferior to a 2018 CFPB action, which resulted in a $10.3 million civil money penalty but no restitution (previous InfoBytes coverage here), stating that “[i]ncredibly, [d]efendants argue that this CFPB action, which denied any recovery to the putative class members here, is a superior means for them to obtain relief.”
Michigan AG sues online tribal lender
On October 31, the Michigan attorney general announced it filed a lawsuit against an online lender alleging the lender violated the CFPA and Michigan law by allegedly offering usurious loans in an “unfair, deceptive, and abusive manner” with interest rates between 388 percent and 1,505 percent. The complaint alleges that the online lender is using its affiliation with a federally recognized Indian tribe located in California to circumvent Michigan’s interest rate cap, but, “is not an arm of the tribe and therefore is not entitled to assert tribal sovereign immunity from suit.” Moreover, the complaint argues that because the lender offers loans to Michigan residents, it is operating outside of tribal boundaries and, therefore, is subject to any and all applicable state and federal laws. In addition to usurious interest rates, the complaint alleges the lender misrepresented contract terms, including various rates and fees, and refused to let consumers pay off loans early. The attorney general is seeking declaratory and injunctive relief to prevent the lender from “providing usurious loans in Michigan in the future.” Notably, this is Michigan’s first-ever lawsuit alleging violations of the CFPA.
California caps rate on installment loans
On October 10, the California governor signed AB 539, known as the “Fair Access to Credit Act,” which amends the California Financing Law (CFL) to limit the rate of interest on certain installment loans. Specifically, for installment loans with a principal amount between $2,500 and $10,000, lenders are prohibited from charging an annual simple interest rate exceeding 36 percent plus the federal funds rate, excluding an administrative fee (not to exceed $50). Moreover, for loans between $2,500 and $10,000, the bill establishes a minimum 12-month loan term. Among other things, the bill also (i) requires lenders to report each borrower’s payment performance of these installment loans to at least one national credit reporting agency; (ii) requires lenders to offer an approved credit education program or seminar approved by the Commissioner of Business Oversight before disbursing the proceeds to the borrower; and (iii) prohibits lenders from charging or receiving any penalty for prepayment for loans made pursuant to the CFL that are not secured by real property. The bill is effective January 1, 2020.
House Republicans push OCC for Madden regulatory fix
On September 19, 26 Republican members of the House Financial Services Committee wrote to the OCC, urging the agency to update its interpretation of the definition of “interest” under the National Bank Act (NBA) to limit the impact of the U.S. Court of Appeals for the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC (covered by a Buckley Special Alert here). The letter argues that Madden deviated from the longstanding valid-when-made doctrine—which provides that if a contract that is valid (not usurious) when it was made, it cannot be rendered usurious by later acts, including assignment—and has “caused significant uncertainty and disruption in many types of lending programs.” Specifically, the letter asserts that the decision “threatens bank-fintech partnerships” that may provide better access to capital and financing to small business and consumers. The letter acknowledges the recently filed amicus brief in the U.S. District Court for the District of Colorado by the OCC and the FDIC, which criticized the Madden decision for disregarding the valid-when-made doctrine and the “stand-in-the-shoes-rule” of contract law (previously covered by InfoBytes here), and requests that the OCC prioritize rulemaking to address the issue.