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New York AG Settles Suit Against Internet Payday Lenders
On January 24, New York Attorney General (AG) Eric Schneiderman announced the resolution of a lawsuit filed in August 2013 against Native American tribe-affiliated payday lending firms and their owners for allegedly violating the state’s usury and licensed lender laws in connection with their issuing of personal loans over the Internet. The AG claims that the companies charged New York consumers annual interest rates on payday loans far in excess of the 16% rate cap set by state law. According to the announcement, the defendants agreed to modify the terms of all outstanding loans made to New York borrowers and to not collect interest on outstanding loans. The defendants also must provide refunds to borrowers who have paid back more than the principal of their loan plus the state-capped interest rate of 16%, and pay $1.5 million in penalties. The companies also must become licensed in New York before offering new loans in the state.
SCOTUS Holds State AG Action Not A Mass Action Subject to CAFA
On January 14, the U.S. Supreme Court unanimously held that an action filed by a state attorney general seeking restitution on behalf of hundreds of the state’s citizens who are not themselves parties to the action is not a "mass action" within the meaning of the Class Action Fairness Act (CAFA), and that such a suit cannot be removed to or filed in federal court under that Act. Mississippi ex rel. Hood v. AU Optronics Corp., No. 12-1036, 2014 WL 113485 (Jan. 14, 2013). In this case, defendants in a civil suit brought by the Mississippi Attorney General on behalf of allegedly harmed state citizens sought to invoke CAFA’s provision allowing the removal of “mass actions,” those “in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact.” The district court and Fifth Circuit looked to the “real parties in interest”—the more than 100 allegedly harmed state citizens—and determined that the case qualified as a mass action. The Court disagreed and held that under a plain reading of CAFA, “100 or more persons” refers to named plaintiffs, not unnamed parties in interest. The Court explained that (i) CAFA uses “persons” and “plaintiffs” the same way they are used in Federal Rule of Civil Procedure 20, i.e. as individuals who are proposing to join as “plaintiffs” in a single action; and (ii) “claims of 100 or more” unnamed individuals cannot be “proposed to be tried jointly on the ground that the. . . claims” of some completely different group of named plaintiffs “involve common questions of law or fact.” Further, the Court determined that (i) the CAFA provision that a “mass action” removed to federal court may not be transferred unless a majority of plaintiffs so request would be unworkable if “plaintiffs” included unnamed real parties in interest; and (ii) Congress did not intend that courts conduct an inquiry into the real parties in interest. The Court declined to reach the issue of whether other state attorney general cases could be deemed class actions under different facts. In the rulings below, both the district and appeals courts rejected defendants' argument that the suit was a class action. The Court also did not reach the issue present in the underlying decisions of whether the suit fell within the “general public” exemption to CAFA mass actions.
New York AG Announces Chief Of New Financial Crimes Bureau
On January 17, New York Attorney General (AG) Eric Schneiderman announced that Gary Fishman will lead a new Criminal Enforcement and Financial Crimes Bureau. The bureau, which expands the Attorney General’s former Criminal Prosecutions Bureau, will focus on combating complex financial crimes in (i) bank and financial institution fraud; (ii) securities and investment fraud; (iii) money laundering; (iv) tax crimes; (v) mortgage fraud; (vi) investment schemes; and (vii) insurance fraud. The bureau also intends to form a Financial Intelligence Section that will review banking, regulatory, law enforcement, and open-source data to identify trends that will enhance the investigation and prosecution of financial crime schemes. Mr. Fishman has served as Senior Investigative Counsel since joining the AG’s office in 2012. Prior to joining the AG’s office, Mr. Fishman was the Managing Director of Investigative Group International and before that served as a New York County District Attorney’s Office prosecutor for more than 15 years, including as the Principal Deputy Chief of the Major Economic Crimes Bureau in the Investigation Division.
Massachusetts AG Obtains Another RMBS Settlement
On December 30, Massachusetts Attorney General (AG) Martha Coakley announced the state’s sixth settlement related to allegedly unlawful RMBS practices, which resulted from the AG’s ongoing review of subprime mortgage securitization practices in Massachusetts. The most recent agreement requires an underwriting firm to pay a total of $17.3 million, which includes $11.3 million to be dedicated to compensate government entities that had invested with the Massachusetts Pension Reserve Investment Management Board and $6 million to be paid to the state.
More State AGs File Suits Against Online Payday Lender, Loan Servicers
On December 16, the North Carolina attorney general (AG) filed a lawsuit against an online payday lender, two loan servicers, and a related debt collection company, and the Colorado AG filed suit against the same loan servicers and collection company. The Colorado AG previously filed a separate suit against the lender. In addition, the New Hampshire AG promised to enforce a state banking department order against the same entities targeted in the other state actions. All three actions are parallel to, and were taken in coordination with, a CFPB action filed December 16 purportedly signaling broader pursuit of “regulatory-evasion schemes.” In general, the states are alleging that the lender violated state usury or licensing laws in the online origination of short-term, small dollar loans. The lender asserts that it is a Native American sovereign entity not subject to relevant state laws. The states also allege that a servicer, either in its own name or through a related entity, provided the lender with marketing, web hosting and customer services, collected consumer information, and conducted the loans’ initial underwriting review, and then purchased all loans immediately after origination. The states further allege that either the servicers or a related debt collection company engaged in servicing and collections, and that the totality of the activities violated state lending and licensing laws by, among other things, financing and collecting on illegal payday loans. The state AG suits are similar to suits previously filed by other state attorneys general, including in New York, Georgia, Minnesota, and Virginia.
CFPB, State AGs Announce First Nonbank National Servicing Settlement
On December 19, the CFPB and attorneys general for 49 states and the District of Columbia, and a nonbank mortgage servicer, filed a proposed consent order in the U.S. District Court for the District of Columbia, pursuant to which the servicer will be required to provide $2 billion in principal reduction to certain borrowers and refund $125 million to nearly 185,000 borrowers who were foreclosed upon.
The agreement is modeled on the 2012 national mortgage servicing settlement between five banks and federal and state authorities, and it is the first such agreement with a nonbank mortgage servicer. The proposed order would resolve allegations that the servicer, and two other servicers it acquired in recent years, engaged in unfair or deceptive acts or practices in the servicing of residential mortgages and foreclosure processing in violation of state consumer protection laws and the Consumer Financial Protection Act. Those allegations are detailed in a complaint filed by the CFPB and states on the same day.
Along with the monetary settlement, the agreement requires the servicer to implement numerous servicing policy changes, which incorporate the standards established in the national servicing settlement and add requirements related to transferred loans. The servicing requirements included in the settlement are in addition to new servicing standards the CFPB finalized earlier this year, which take effect on January 10, 2014. Compliance with the agreement will be overseen by the monitor of the national settlement. The agreement does not include releases for any potential claims of criminal liability and does not prohibit private actions.
Colorado AG Files Suit against Debt Buyers Alleging Fraudulent Collection Practices
On December 10, the Colorado Attorney General (AG) announced a lawsuit against a debt buyer and its principal for allegedly engaging in fraudulent conduct in attempting to collect charged-off debt purchased from two national banks. The complaint also names two debt collection companies to whom the debt buyer resold some of the debt acquired from the banks. The AG asserts that all three companies routinely used false affidavits to collect on the debt.
The complaint scrutinizes the agreements pursuant to which the banks transferred the charged-off debt to the debt buyer. The AG states that the agreements limited the information the banks were obligated to provide to the buyer, requiring it to purchase evidence of the debt from the banks as needed. If the buyer requested documents that the banks could not locate, the banks agreed to provide affidavits attesting to the validity of such debts.
According to the complaint, the debt buyer sought to maximize its profits by using such affidavits and other materials provided by the banks to fabricate similar documents. It then allegedly used those false materials to collect debts from Colorado consumers, or provided the fabricated materials to the debt collectors to whom it had resold some of the debt. The complaint notes that neither of the two debt collectors “had policies or procedures for the evaluation of the validity or accuracy of account documentation that they received regarding debt that they purchased or sought to collect on.”
The AG claims that the creation, use, and distribution of the false bank documents violated the Colorado Fair Debt Collection Practices Act and the Colorado Consumer Protection Act. The AG also claims the debt buyer conducted collection activities in the state without obtaining a license, in violation of the state licensing law. The complaint seeks, among other things, civil penalties, actual damages, restitution, and disgorgement of all profits from the allegedly unlawful activities.
CFPB Announces First Online Lending Lawsuit
On December 16, the CFPB announced a civil lawsuit against a California-based online loan servicer and its owner, subsidiary, and affiliate for allegedly violating the Consumer Financial Protection Act by collecting money consumers did not owe. This is the first CFPB enforcement action to target online lending directly and, according to the CFPB, represents “a significant step in the Bureau’s efforts to address regulatory-evasion schemes that are increasingly becoming a feature of the online small-dollar and payday lending industry.”
The subject loans were acquired from an online payday lender that recently shut down its operations after commencement of investigations and court actions across several states. According to the complaint, the defendants violated licensing requirements and interest-rate caps in several states that rendered certain high-cost loans void or otherwise nullified but nonetheless continued to collect money from borrowers. The complaint states that the defendants’ engaged in unfair and deceptive practices by sending collection notices, debiting accounts, and demanding payments related to such loans without disclosing that the borrowers were not obligated to pay the amounts under state law. The complaint also alleges that the defendants’ actions were abusive because they took unreasonable advantage of consumers’ lack of understanding of applicable state laws.
The CFPB action parallels actions taken by several other state attorneys general on the same day.
Fifth Circuit Holds State AG Credit Card Add-On Suit Not Subject To Federal Jurisdiction
On December 2, the U.S. Court of Appeals for the Fifth Circuit held that a set of parens patriae suits filed by the Mississippi Attorney General (AG) against credit card issuers is not subject to federal jurisdiction under the Class Action Fairness Act (CAFA) or National Bank Act (NBA) preemption. Hood v. JP Morgan Chase & Co., No. 13-60686, 2013 WL 6230960 (5th Cir. Dec. 2, 2013). The consolidated appeal involves cases originally filed by the AG in state court against six credit card issuers for allegedly violating the Mississippi Consumer Protection Act in connection with the marketing, sale, and administering of certain ancillary products, including payment protection plans. After the card issuers removed the cases, a federal district court denied the state’s motion to remand, holding that it had subject matter jurisdiction because: (i) the cases were CAFA mass actions; (ii) the NBA (and the Depository Institutions Deregulation and Monetary Control Act for one state-chartered bank defendant) preempted some of the state law claims; and (iii) it had supplemental jurisdiction over the remaining state law claims. The Sixth Circuit disagreed and held that the card issuers failed to prove that any card holder met CAFA’s individual amount in controversy requirement, rejecting the issuers’ argument that the state is the real party in interest and its claims for restitution and civil penalties exceed the threshold. The court also rejected the issuers’ argument—and the district court’s holding—that the payment protection plans were part of the loan agreement and the fees associated with the plans constitute “interest,” such that the state’s challenge to the plans was an implicit usury claim preempted by the NBA. Instead, the court held that while the plans could conceivably fit within the definition of “interest,” there is no clear rule on this subject that demands removal. Moreover, the court held that even if the payment protection plan fees are “interest,” the claims still would not be preempted because the state does not allege that the issuers charged too much interest, but rather challenges the alleged practice of improperly enrolling customers in the plans. The court reversed the district court and remanded for further proceedings consistent with its opinion.
Federal, State Authorities Announce Largest RMBS Settlement To Date
On November 19, the DOJ, other federal authorities, and state authorities in California, Delaware, Illinois, and Massachusetts, announced a $13 billion settlement of federal and state RMBS civil claims, which were being pursued as part of the state-federal RMBS Working Group, part of the Obama Administration’s Financial Fraud Enforcement Task Force. The DOJ described the settlement as the largest it has ever entered with a single entity. Federal and state law enforcement authorities and financial regulators alleged that the bank and certain institutions it acquired mislead investors in connection with the packaging, marketing, sale and issuance of certain RMBS. They claimed the institutions’ employees knew that loans backing certain RMBS did not comply with underwriting guidelines and were not otherwise appropriate for securitization, yet allowed the loans to be securitized and sold without disclosing the alleged underwriting failures to investors.The agreement includes $9 billion in civil penalties and $4 billion in consumer relief. Of the civil penalty amount, $2 billion resolves DOJ’s claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), $1.4 billion resolves federal and state securities claims by the NCUA, $515.4 million resolves federal and state securities claims by the FDIC, $4 billion settles federal and state claims by the FHFA, while the remaining amount resolves claims brought by California ($298.9 million), Delaware ($19.7 million) Illinois ($100.0 million), Massachusetts ($34.4 million), and New York ($613.0 million). The bank also was required to acknowledge it made “serious misrepresentations.” The agreement does not prevent authorities from continuing to pursue any possible related criminal charges.