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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.”
On December 31, a credit reporting agency (agency) and a class of consumers whose payday loan servicer collapsed jointly filed a proposed $24 million settlement agreement for approval by the U.S. District Court for the Central District of California (also, see the memorandum in support here). The proposed agreement would resolve a class action suit alleging that the agency provided incorrect and potentially harmful information on the class members’ credit reports in violation of the FCRA.
In 2016, the class representative (the consumer) sued the agency claiming it was reporting disputed debts from a payday loan servicer that had previously requested that the agency stop reporting the servicer’s pool of payday loan accounts. Because the servicer had also discontinued its servicing operations, the debts could no longer be verified. The consumer alleged that although the agency claimed to have deleted the payday loan servicer’s accounts in January of 2015, it continued to report as delinquent more than 100,000 loans until the accounts were actually deleted more than a year later. After the district court granted a motion for summary judgment filed by the agency, the consumer appealed to the U.S. Court of Appeals for the Ninth Circuit.
As previously covered in InfoBytes, upon appeal in 2019, the appellate court vacated the lower court’s grant of summary judgment on the ground that the consumer’s allegations regarding the inaccuracy of the agency’s information and the willfulness of its actions “raised genuine issues of material fact.” On remand, the district court granted class certification in October. The proposed settlement agreement, if approved, would automatically award each class member approximately $270, and provide up to $15,000 to the consumer who originally filed the lawsuit as the class representative. A hearing date is set for January 27.
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.
On December 10, in a speech before the National Association of Attorneys General Capital Forum, CFPB Director Kathy Kraninger discussed partnership with the states, as well as recent efforts between the Bureau and states in the areas of supervision and enforcement, including innovation policies. Kraninger also discussed the Bureau’s small dollar and debt collection rules. Noting that the Bureau will “effectively enforce the law to fulfill our consumer protection mission … after thoroughly reviewing the facts,” Kraninger recapped FY 2019 enforcement actions and settlements, which have resulted in more than $777 million in total consumer relief, which included over $600 million in consumer redress and more than $174 million in other relief. These actions, Kraninger stated, have resulted in more than $185 million in civil money penalties, not taking into account suspended amounts. Kraninger also highlighted several joint efforts with states and other agencies over the past year, including (i) a multi-agency action resolving a 2017 data breach (InfoBytes coverage here); (ii) a joint action with the New York Attorney General against a network of New York-based debt collectors that allegedly engaged in improper debt collection tactics (InfoBytes coverage here); (iii) a coordinated action with the Minnesota Attorney General’s Office, the North Carolina Department of Justice, and the Los Angeles City Attorney concerning a student loan debt relief operation (InfoBytes coverage here); and (iv) an action with the South Carolina Department of Consumer Affairs against an operation that offered high-interest loans to veterans and other consumers in exchange for the assignment of some of the consumers’ monthly pension or disability payments (InfoBytes coverage here).
Kraninger also discussed the Bureau’s recently-announced American Consumer Financial Innovation Network (ACFIN), which is designed to enhance coordination among federal and state regulators to facilitate financial innovation. (InfoBytes coverage here). ACFIN currently includes nine state attorneys general and four state financial regulators. Kraninger noted that the Bureau is presently reviewing approximately 190,000 comments concerning proposed changes related to certain payday lending requirements and mandatory underwriting provisions (InfoBytes coverage here), as well as over 14,000 comments submitted in response to its Notice of Proposed Rulemaking issued in May concerning amendments to the debt collection rule (InfoBytes coverage here). Kraninger stressed that the Bureau plans to release a Supplemental Notice of Proposed Rulemaking “very early” in 2020, and will be “interested in practical and pragmatic ideas of how to make time-barred debt disclosures work.”
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.
On November 20, the Office of Information and Regulatory Affairs released the CFPB’s fall 2019 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters it “reasonably anticipates having under consideration during the period from October 1, 2019, to September 30, 2020.”
Key rulemaking initiatives include:
- Property Assessed Clean Energy (PACE) Financing: As previously covered by InfoBytes, the Bureau published an Advanced Notice of Proposed Rulemaking (ANPR) in March 2019 seeking feedback on the unique features of PACE financing and the general implications of regulating PACE financing under TILA. The Bureau notes it is currently reviewing comments as it considers next steps.
- Small Business Rulemaking: On November 6, the Bureau held a symposium on small business lending to gather information for upcoming rulemaking (previously covered by InfoBytes here). The Bureau emphasized it will focus on rulemaking that would not impede small business access to credit by imposing unnecessary costs on financial institutions. According to the Bureau, materials will be released prior to convening a panel under the Small Business Regulatory Enforcement Fairness Act to consult with businesses that may be affected by future rulemaking.
- HMDA/Regulation C: The Bureau plans to finalize the permanent thresholds for reporting data on open-end lines of credit and closed-end mortgage loans in March 2020, and expects to issue a Notice of Proposed Rulemaking (NPRM) to govern the collection of HMDA data points and the disclosure of this data in July 2020. Both initiatives follow an NPRM and an ANPR issued by the Bureau in May (previously covered by InfoBytes here).
- Payday, Vehicle Title, and Certain High-Cost Installment Loans: As previously covered by InfoBytes, the Bureau published two NPRMs related to certain payday lending requirements under the final rule titled “Payday, Vehicle Title, and Certain High-Cost Installment Loans.” Specifically, the Bureau proposed to rescind the portion of the rule that would make it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay, and to delay the rule’s compliance date for mandatory underwriting provisions. The Bureau notes it is currently reviewing comments and expects to issue a final rule in April 2020.
- Debt Collection: Following an NPRM issued in May concerning debt collection communications, disclosures, and related practices (previously covered by InfoBytes here), the Bureau states it is currently “engaged in testing of consumer disclosures related to time-barred debt disclosure issues that were not addressed in the May 2019 proposal.” Once testing has concluded, the Bureau will assess the need for publishing a supplemental NPRM related to time-barred debt disclosures.
- Remittance Transfers: The Bureau expects in December to issue a proposed rule to address the July 2020 expiration of the Remittance Rule’s temporary exception for certain insured depository institutions from the rule’s disclosure requirements related to the estimation of fees and exchange rates. (Previously covered by InfoBytes here.)
- GSE Patch: The Bureau plans to address in December the so-called GSE patch, which confers Qualified Mortgage status for loans purchased or guaranteed by Fannie Mae and Freddie Mac while those entities operate under FHFA conservatorship. The patch is set to expire in January 2021, or when Fannie and Freddie exit their conservatorships, whichever comes first. (See Buckley Special Alert here.)
The Bureau further notes in its announcement the addition of entries to its long-term regulatory agenda “to address issues of concern in connection with loan originator compensation and to facilitate the use of electronic channels of communication in the origination and servicing of credit card accounts.”
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.”
On September 19, the NCUA announced the approval of a final rule creating a new payday alternative loan product (PAL II). As previously covered by InfoBytes, in June 2018, NCUA proposed the PAL II as an additional offering to the current payday alternative loan product (PAL I), which has been available since 2010. PAL II includes most features of PAL I except that it (i) eliminates a loan minimum and sets the maximum at $2,000; (ii) requires a minimum loan term of one month and a maximum of 12 months; and (iii) does not contain a requirement for the minimum length of a membership. Moreover, federal credit unions are restricted to offering only one type of PAL loan to a member at any given time. All prior requirements of PAL I loans, such as the prohibition against rollovers, the limit on the number of loans a single borrower can take in a given period, and full amortization, remain in effect. The final rule will be effective 60 days after publication in the Federal Register.
On August 28, the U.S. Court of Appeals for the 11th Circuit held that a district court did not err when it denied a group of lenders’ motion to dismiss class action claims alleging that their loan agreements violated Georgia’s Payday Lending Act (PLA), the Georgia Industrial Loan Act (GILA), and state usury laws. According to the opinion, the plaintiffs entered into agreements for loans generally amounting to less than $3,000 that were to be repaid from recoveries received by the plaintiffs in their individual personal injury lawsuits. The defendants moved to dismiss the complaint and strike the class allegations, arguing that the loan agreements’ forum-selection clause required the borrowers to bring their lawsuit in Illinois, and that the class action waiver provision in the agreements prevented the plaintiffs from being able to file any class action against them. The plaintiffs maintained, however, that these provisions in the loan agreements were unenforceable because they violated Georgia public policy, and the district court agreed.
On appeal, the 11th Circuit affirmed the district court because it also concluded that the loan agreements’ forum-selection and class action waiver provisions were unenforceable as against Georgia public policy. Regarding the forum-selection clause, the appellate court held that the PLA “establish[es] a clear public policy against out-of-state lenders using forum selection clauses to avoid litigation in Georgia courts.” Regarding the class action waiver, the appellate court noted that both the PLA and the GILA specifically authorize class action suits; that the district court did not consider whether the waivers were procedurally or substantively unconscionable did not matter because the fact that the waivers violate public policy is an independent and sufficient basis to hold them unenforceable. The defendants also noted that the statutes did not prohibit class action waivers or create a statutory right to pursue class actions, but a contractual provision “need not literally conflict with Georgia law to contravene public policy.” (Citing Langford v. Royal Indemnity Co.) Instead, the appellate court agreed with the district court that “enforcement of the class action waivers in this context would eliminate a remedy contemplated by the Georgia legislature and undermine the purpose of the PLA and the GILA.”
On August 23, the Illinois governor signed SB 1758, which amends the state’s Consumer Installment Loan Act and the Payday Loan Reform Act. Generally, payday loans must be repayable in substantially equal and consecutive installments. The amendment clarifies that a “‘substantially equal installment’ includes a last regularly scheduled payment that may be less than, but not more than 5% larger than, the previous scheduled payment according to a disclosed payment schedule agreed to by the parties.” The amendments take effect immediately.
- Andrew W. Schilling to moderate "Expectations of in-house counsel from their law firm partners" at the ACI's 7th Annual Advanced Forum on False Claims and Qui Tam
- Sasha Leonhardt to discuss "Cybersecurity basics for compliance staff" at a NAFCU webinar
- Buckley Webcast: Tips for navigating changes to the FHA recertification process
- Daniel P. Stipano to discuss "A 20/20 view on 2020’s legislative and regulatory outlook" at the ACAMS Anti-Financial Crime and Public Policy Conference
- Kari K. Hall and Michelle L. Rogers to discuss "Overdrafts and regulatory trends" at the CLE Alabama Banking Law Update
- Kathryn L. Ryan to discuss "Industry open forum session on NMLS usage" at the NMLS Annual Conference & Training
- Kathryn L. Ryan to discuss "Regulating innovative consumer lending products" at the NMLS Annual Conference & Training
- Daniel P. Stipano to moderate "Washington update" at the 17th Puerto Rican Symposium of Anti Money Laundering 2020 conference
- Melissa Klimkiewicz to discuss "Private flood insurance updates" at the MBA's Servicing Solutions Conference & Expo 2020
- APPROVED Checkpoint Webcast: CFL overview
- Sasha Leonhardt to discuss "MLA & SCRA" on a NAFCU webinar
- Daniel P. Stipano to discuss "Pathway of the SARs: Tracking trajectories of suspicious activity reports from alerts to prosecution" at the ACAMS moneylaundering.com 25th Annual International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Which bud’s for you? A deep-dive into evolving marijuana laws" at the ACAMS moneylaundering.com 25th Annual International AML & Financial Crime Conference