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Financial Services Law Insights and Observations


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  • SEC charges Florida payday lender with making fraudulent misrepresentations in offering


    On September 27, the SEC filed charges against a Florida-based payday lender and its CEO (collectively, “defendants”) for fraudulently raising more than $66 million through the sale of promissory notes to hundreds of retail investors, including members of the South Florida Venezuelan-American community. The SEC charges the defendants with falsely promising investors that their money would be used solely to make small-dollar, short-term loans and for associated costs. However, the defendants allegedly misappropriated roughly $2.9 million for personal use, transferred approximately $3.6 million to family and friends without an apparent legitimate business purpose, and used at least $19.2 million of investor funds to make Ponzi-like payments to other investors. The complaint further contends that the defendants mislead investors by promising high annual returns and representing that the business was profitable, and made misrepresentations about the safety and security of the promissory notes. The SEC’s complaint alleges violations of the registration and antifraud provisions of the federal securities laws, and charges the CEO with acting as an unregistered broker. The complaint seeks a permanent injunction against the defendants, disgorgement with prejudgment interest, civil penalties, and an officer and director ban against the CEO.

    Securities Enforcement SEC Payday Lending Small Dollar Lending Fraud

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  • District Court: Arbitration provision is severable from a voided loan contract


    On September 16, the U.S. District Court for the Southern District of Alabama granted a defendant tribal payday lender’s motion to dismiss and compel arbitration, ruling that an arbitration agreement in a loan contract is still valid even if an arbitration panel found the contracts were void. The plaintiff initiated an arbitration proceeding against the defendant alleging that payday loan contracts carrying interest rates between 200 and 830 percent were void because the defendant was not licensed under the Alabama Small Loans Act to extend such loans. An American Arbitration Association panel determined, among other things, that the defendant had waived any tribal sovereign immunity, “the transactions involved off-reservation commercial activities to which sovereign immunity does not apply,” and that the loans were entirely void because each of the loans was extended without a license. The plaintiff filed suit in state court to confirm the arbitration award and pursue a class action on the premise that the loans are usurious and should be declared void. The defendant removed the case to federal court and asked the court to dismiss the proposed class action and compel arbitration. The district court agreed with the defendant that the arbitration agreement in the voided loan contract remained binding despite the arbitrator’s earlier determination in the plaintiff’s favor. Specifically, the court disagreed with the plaintiff’s argument that the arbitrator’s determination meant that “no aspect of the contact survives,” stating that the plaintiff “overlooks a central tenet in binding precedential arbitration law: severability.” According to the court, “‘[a]s a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.’”

    Courts Arbitration Tribal Lending Usury Payday Lending Class Action State Issues Interest Rate

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  • CFPB announces payday lending rule compliance date

    Federal Issues

    On September 7, the CFPB acting Director, Dave Uejio, released a statement regarding the decision by the U.S. District Court for the Western District of Texas to uphold the Payment Provisions in the CFPB’s 2017 rule on payday, vehicle title, and certain high-cost installment loans (covered by InfoBytes here). Ueijio hailed the decision as a reaffirmation of the Bureau’s “ability to protect borrowers from unfair and abusive payment practices in the payday lending and other markets covered by the rule.” Uejio then stated that compliance with the rule will become mandatory on June 13, 2022, and that the Bureau “expects lenders to follow the requirements of the payment provisions, consistent with the court’s order.”

    Federal Issues CFPB Payday Lending Agency Rule-Making & Guidance

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  • Court temporarily stays compliance with CFPB’s payday rule


    On August 31, the U.S. District Court for the Western District of Texas granted summary judgment in favor of the CFPB in an action filed by two trade groups challenging the payment provisions of the Bureau’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (2017 Rule), but stayed the August 19, 2019 compliance date for 286 days after final judgment as requested by the plaintiffs. As previously covered by InfoBytes, the plaintiffs challenged the 2017 Rule’s payment provisions’ compliance date and asked the court to set aside the 2017 Rule and the Bureau’s ratification of the payment provisions of the 2017 Rule as unconstitutional and in violation of the Administrative Procedures Act.

    In granting summary judgment to the Bureau, the court ruled that the ratification “was valid and cured the constitutional injury caused by the 2017 Rule’s approval by an improperly appointed official.” Among other things, the court also concluded that the payment provisions, as a matter of law, “are consistent with the Bureau’s statutory authority and are not arbitrary and capricious,” and that the Bureau properly considered the costs and benefits of such payment provisions. However, in granting the plaintiffs’ request for a longer stay, the court stated it was persuaded by the plaintiffs’ arguments “that they should receive the full benefit of the temporary stay and that a more substantial compliance date allows time for appeal,” consistent with the fact that the “stay was requested with 445 days left until the implementation deadline, and it was entered with 286 days remaining.” 

    Courts Payday Lending Payday Rule CFPB Administrative Procedures Act Agency Rule-Making & Guidance

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  • CFPB and lenders file briefs for 2017 payday lending case


    On August 6, the U.S. District Court for the Western District of Texas received briefs from the CFPB and the two trade groups (plaintiffs) challenging the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (2017 Rule) regarding a compliance date for the 2017 Rule’s payment provisions. The briefs were filed in response to the court’s July 29 order requesting briefing “concerning what would be the appropriate compliance date if the court were to deny Plaintiffs’ motion for summary judgment and grant Defendants’ motion for summary judgment.” As previously covered by InfoBytes, in August 2020, the plaintiffs asked the court to set aside the 2017 Rule and the Bureau’s ratification of the payment provisions of the 2017 Rule as unconstitutional and in violation of the Administrative Procedures Act (APA). Earlier in July 2020, the Bureau issued a final rule revoking the 2017 Rule’s underwriting provisions and ratified the 2017 Rule’s payment provisions (covered by InfoBytes here) in light of the U.S. Supreme Court’s decision in Seila Law LLC v CPFB (covered by a Buckley Special Alert, holding that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau). 

    According to the CFPB’s brief, the stay of the compliance date should remain in place for no longer than 30 days after the Court’s decision on summary judgment. The CFPB argued, among other things, that a 30-day delay is consistent with the APA and should provide sufficient time to make any final preparations. In addition, the CFPB argued that complying with the payment provisions is not considered “onerous” because the provisions generally prohibit lenders from withdrawing payments for a covered loan from a borrower’s account after two consecutive attempts have failed due to lack of sufficient funds and because the provisions require lenders to give consumers certain notices, specifically before attempting to withdraw a payment for the first time and before making an “unusual” withdrawal attempt. In addition, the CFPB argued that “[f]urther extension of the stay is particularly unwarranted because the only basis for the stay disappeared over a year ago.”

    According to the plaintiffs’ brief, an “order lifting the stay…should set the compliance date no earlier than 445 days (or, at a minimum, 286 days) from the date the court lifts the stay, reflecting the time left for compliance when the stay was sought (or entered).” In addition to arguing that requiring immediate compliance would violate the APA, the plaintiffs argued, among other things, that “the 2017 Rule gave lenders twenty-one months before compliance would be required, which the Bureau viewed as necessary to give lenders ‘enough time for an orderly implementation period’ and to ‘reasonably adjust their practices to come into compliance.’” Moreover, the plaintiffs argued that the Bureau will need to set a new compliance date via notice-and-comment rulemaking if the stay did not toll the compliance period.

    Responses from both parties are due by August 16.

    Courts CFPB Payday Rule Payday Lending Administrative Procedures Act

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  • Payday lender must comply with $50 million CFPB order


    On July 30, the U.S. District Court for the District of Kansas granted a petition filed by the CFPB to enforce an administrative order that assessed more than $50 million in restitution and fines against a Delaware-based online payday lender and its CEO (collectively, “respondents”) while the parties await a decision from the U.S. Court of Appeals for the Tenth Circuit. As previously covered by InfoBytes, the CFPB filed an action in 2015 against the respondents for allegedly violating TILA and EFTA and for engaging in unfair or deceptive acts or practices concerning the terms of the loans they originated. The respondents also allegedly (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked their authorization to do so; (ii) required consumers to repay loans via pre-authorized electronic fund transfers; and (iii) deceived consumers about the cost of short-term loans by providing them with contracts that contained disclosures based on repaying the loan in one payment, while the default terms called for multiple rollovers and additional finance charges.

    In January 2021, former Director Kathy Kraninger adopted an administrative law judge’s findings and conclusions, affirming the respondents violated TILA, EFTA, and the CFPA and concluding the respondents should be held jointly and severally liable for restitution amounting to more than $38.4 million. Kraninger further held the lender liable for a $7.5 million civil penalty and the CEO liable for a civil penalty of $5 million. In March, acting Director Dave Uejio issued an order denying the respondents’ motion to stay Kraninger’s final decision pending appellate review, but granted their request for a 30-day stay to allow them the opportunity to seek a stay from the 10th Circuit. In opposition to the Bureau’s petition to enforce the final order, the CEO argued, among other things, that the final order is not valid and enforceable. The court noted, however, that it is not permitted to stay enforcement of or suspend the final order. The power to suspend the final order or stay its enforcement belongs to the 10th Circuit—a request, the court noted, that the respondents did not seek when they filed their appeal. The CEO “has not cited any authority indicating that this Court may or should refuse to grant a petition for enforcement under this statute,” the court wrote. “Accordingly, the Court grants the petition for enforcement of the Final Order, and respondents are hereby ordered to comply with the Final Order by paying the restitution and civil penalties imposed and by cooperating as directed.”

    Courts CFPB Enforcement Payday Lending TILA EFTA CFPA Unfair Deceptive

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  • District Court certifies “rent-a-tribe” class action


    On July 20, the U.S. District Court for the Eastern District of Virginia certified a “rent-a-tribe” class action alleging an individual who orchestrated an online payday lending scheme violated the Racketeer Influenced and Corrupt Organization Act (RICO), engaged in unjust enrichment, and violated Virginia’s usury law by partnering with federally-recognized tribes to issue loans with allegedly usurious interest rates. The plaintiffs alleged the defendant partnered with the tribes to circumvent state usury laws even though the tribes did not control the lending operation. The court ruled that, as there was “no substantive involvement” by the tribes in the lending operation and evidence showed that the defendant was “functionally in charge,” the lending operation—which allegedly charged interest rates exceeding Virginia’s 12 percent interest cap—could not claim tribal immunity. The plaintiffs moved to certify two RICO classes, distinguished from each other based on the lending entity, each with two sub-classes of borrowers: (i) a usury sub-class of borrowers who either paid any principal, interest, or fees on their loans; and (ii) a unjust enrichment subclass of borrowers who paid any amount on their loans. The defendant challenged class certification, arguing that “due to his changing roles” in the lending operation over the class period “differences between class members will result in a need for a series of complicated mini-trials.” In certifying the two RICO classes, the court called the defendant’s recommendation to bring individual lender suits “an unnecessary and untenable burden on the judicial system.” Furthermore, the court wrote that “[w]ith respect to [p]laintiffs’ unjust enrichment claims, [the defendant] also attempts to argue that some [p]laintiffs did not confer a benefit on [the defendant] because they paid back less than they received on their loans.” However, the court noted that because Virginia law states that any contract in violation of the state’s usury law is void, “any money paid on a void contract could constitute a benefit for the purposes of an unjust enrichment.”

    Courts Class Action RICO Consumer Finance Tribal Lending Usury Interest Rate Payday Lending State Issues

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  • DFPI reports significant decline in payday lending during pandemic

    State Issues

    On July 22, DFPI reported that California payday lenders made fewer than 6.1 million loans during the Covid-19 pandemic—a 40 percent decline from 2019. Key findings in the 2020 Annual Report of Payday Lending Activity Under the California Deferred Deposit Transaction Law, include: (i) nearly 61.8 percent of licensees reported serving consumers who received government assistance; (ii) borrowers who take out subsequent loans accounted for 69 percent of payday loans in 2020; (iii) licensees collected $250.8 million in payday loan fees, of which 68 percent came from borrowers who made at least seven transactions during the year; (iii) 49 percent of borrowers had average annual incomes of $30,000 or less, and 30 percent had average annual incomes of $20,000 or less; (iv) online payday loans made up one-third of all payday loans (41 percent of borrowers took out payday loans over the internet); and (v) cash disbursement continued to decrease in 2020, while other forms of disbursement, such as wire transfers, bank cards, and debit cards increased. DFPI also noted that during this time period the number of payday loan borrowers referred by lead generators declined by 69 percent, and that the number of licensed payday lending locations also dropped by 27.7 percent. DFPI acting Commissioner Christopher S. Shultz commented that the decrease in payday loans during the pandemic may be attributable to several factors, “such as stimulus checks, loan forbearances, and growth in alternative financing options,” adding that DFPI continues to closely monitor financial products marketed to consumer in desperate financial need.

    State Issues State Regulators DFPI Payday Lending Covid-19 Lead Generation

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  • CFPB issues summer supervisory highlights

    Federal Issues

    On June 29, the CFPB released its summer 2021 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of auto loan servicing, consumer reporting, debt collection, deposits, fair lending, mortgage origination and servicing, payday lending, private education loan origination, and student loan servicing. The findings of the report, which are published to assist entities in complying with applicable consumer laws, cover examinations that generally were completed between January and December of 2020. Highlights of the examination findings include:

    • Auto Loan Servicing. Bureau examiners identified unfair acts or practices related to lender-placed collateral protection insurance (CPI), including instances where servicers charged unnecessary CPI or charged for CPI after repossession. Examiners also identified unfair acts or practices related to payoff amounts where consumers had ancillary product rebates due, and also found unfair or deceptive acts or practices related to payment application.
    • Consumer Reporting. The Bureau found deficiencies in consumer reporting companies’ (CRCs) FCRA compliance related to the following requirements: (i) accuracy; (ii) security freezes applicable to certain CRCs; and (iii) ID theft block requests. Specifically, examiners found that CRCs continued to include information from furnishers despite receiving furnisher dispute responses that “suggested that the furnishers were no longer sources of reliable, verifiable information about consumers.” Additionally, the report noted instances where furnishers failed to update and correct information or conduct reasonable investigations of direct disputes.
    • Debt Collection. The report found that examiners found instances of FDCPA violations where debt collectors (i) made calls to a consumer’s workplace; (ii) communicated with third parties; (iii) failed to stop communications after receiving a written request or a refusal to pay; (iv) harassed consumers regarding their inability to pay; (v) communicated, and threatened to communicate, false credit information to CRCs; (vi) made false representations or used deceptive collection means; (vii) entered inaccurate information regarding state interest rate caps into an automated system; (viii) unlawfully initiated wage garnishments; and (ix) failed to send complete validation notices.
    • Deposits. The Bureau discussed violations related to Regulation E and Regulation DD, including error resolution violations, issues with provisional credits, failure to investigate, failure to remediate errors, and overdraft opt-in and disclosure violations.
    • Fair Lending. The report noted instances where examiners cited violations of HMDA/ Regulation C involving HMDA loan application register inaccuracies, and instances where lenders, among other things, violated ECOA/Regulation B “by engaging in acts or practices directed at prospective applicants that would have discouraged reasonable people in minority neighborhoods in Metropolitan Statistical Areas (MSAs) from applying for credit.”
    • Mortgage Origination. The Bureau cited violations of Regulation Z and the CFPA related to loan originator compensation, title insurance disclosures, and deceptive waivers of borrowers’ rights in security deed riders and loan security agreements.
    • Mortgage Servicing. The Bureau cited violations of Regulation X, including those related to dual tracking violations, misrepresentations regarding foreclosure timelines, and PMI terminations.
    • Payday Lending. The report discussed violations of the CFPA for payday lenders, including falsely representing an intent to sue or that a credit check would not be run, and presenting deceptive repayment options to borrowers that were contractually eligible for no-cost repayment plans.
    • Private Education Loan Origination. Bureau examiners identified deceptive acts or practices related to the marketing of private education loan rates.
    • Student Loan Servicing. Bureau examiners found several types of misrepresentations servicers made regarding consumer eligibility for the Public Service Loan Forgiveness (PSLF) program, and identified unfair acts or practices related to a servicer’s “failure to reverse negative consequences of automatic natural disaster forbearances.” Additionally, examiners identified unfair act or practices related to failing to honor consumer payment allocation instructions or providing inaccurate monthly payment amounts to consumers after a loan transfer.

    The report also highlights recent supervisory program developments and enforcement actions.

    Federal Issues CFPB Supervision Consumer Finance Consumer Reporting Redlining Foreclosure Auto Finance Debt Collection Deposits Fair Lending Mortgage Origination Mortgage Servicing Mortgages Payday Lending Student Lending

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  • 9th Circuit reverses $1.3 billion judgment following Supreme Court’s decision


    On June 8, the U.S. Court of Appeals for the Ninth Circuit issued an order vacating its December 2018 judgment, reversing a district court’s award of equitable monetary relief following the U.S. Supreme Court’s recent decision in FTC v. AMG Capital Management, and remanding the case to the district court for further proceedings consistent with the Supreme Court’s opinion. The decision impacts defendants—a Kansas-based operation and its owner—who were ordered in 2016 to pay an approximately $1.3 billion judgment for allegedly operating a deceptive payday lending scheme and violating Section 5(a) of the FTC Act by making false and misleading representations about loan costs and payments (covered by InfoBytes here). The 9th Circuit previously upheld the judgment (covered by InfoBytes here) by, among other things, rejecting the defendant owner’s challenge, which was based on an argument that the district court overestimated his “wrongful gain” and that the FTC Act only allows the court to issue injunctions. At the time, the 9th Circuit concluded that the defendant owner failed to provide evidence contradicting the wrongful gain calculation and that a district court may grant any ancillary relief under the FTC Act, including restitution. However, as previously covered by InfoBytes, the Supreme Court reversed the 9th Circuit and held that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement.”

    Courts Appellate Ninth Circuit FTC FTC Act Payday Lending TILA Disclosures U.S. Supreme Court

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