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.
On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.
The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.
Mortgage Rule Implementation / Impact
Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.
The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members. Read more…
California Appellate Court Holds State Regulators Lack Authority To Regulate Tribe-Affiliated Lenders
On January 21, the California Court of Appeal, Second District, held that short-term, small-dollar credit businesses owned by certain federally recognized Indian tribes are sufficiently related to their respective tribes to be protected under the doctrine of tribal immunity from state regulation. California v. Miami Nation Enterprises, No. B242644, 2014 WL 212220 (Cal. Ct. App. Jan. 21, 2014). The court affirmed a trial court’s dismissal of a civil action filed by the Commissioner of the California Department of Corporations seeking to enforce an order directing five tribe-affiliated lenders to cease providing payday loans over the Internet to California residents allegedly in violation of several provisions of the California Deferred Deposit Transaction Law. The two tribes had entered into management agreements with a non-tribal payday marketing company to direct and operate their lending activities. The court rejected the Commissioner’s argument that tribal immunity does not apply because under those agreements the day-to-day operations of the businesses have been effectively delegated to a nontribal entity, and that the tribes do not participate in the net income from the businesses, receiving instead only a “modest percentage” of the gross revenues. The court held that a business functions as an arm of the tribe if it (i) has been formed by tribal resolution and according to tribal law, for the purpose of tribal economic development and with the clearly expressed intent by the sovereign tribe to convey its immunity to that entity; and (ii) has a governing structure both appointed by and ultimately overseen by the tribe. The court added that “[n]either third-party management of day-to-day operations nor retention of only a minimal percentage of the profits from the enterprise (however that may be defined) justifies judicial negation of that inherent element of tribal sovereignty.”
On November 6, the CFPB announced that it now will formally accept borrower complaints regarding payday loans through its online complaint portal and by phone. The CFPB’s complaint taking process launched with the Bureau in July 2011, and the CFPB began publishing complaints through its online complaint database in June 2012. The CFPB started with credit card complaints and has since expanded the complaint program and public database to cover mortgages, debt collection, credit reporting, student and other consumer loans, and other products and services. Read more…
On September 27, the FDIC issued Financial Institution Letter FIL-43-2013, which is intended to clarify the FDIC’s policy and supervisory approach related to financial institutions that facilitate payment processing services—directly or through a third party—for merchant customers engaged in “higher-risk activities.” The letter states that banks that perform these services for merchants engaged in activities that “tend to display a higher incidence of consumer fraud or potentially illegal activities” are expected to perform proper risk assessments, conduct due diligence to determine the merchants are operating in accordance with applicable law, and maintain systems to monitor the relationships with payment processors and merchants. Institutions that properly manage payment processing relationships and risks are not prohibited or discouraged from providing such services to businesses operating in compliance with applicable law. The FDIC intends to assess whether institutions are adequately overseeing these activities and addressing related risks. The FDIC’s statement follows concerns raised by certain banks, their representatives in Congress, and third-party payment processors about the scope of the governmental scrutiny of online lenders, payment processors, and their relationships with banks.
Federal District Court Denies Tribal Lenders’ Attempt to Block New York Internet Lending Investigation
On September 30, the U.S. District Court for the Southern District of New York denied a motion filed by two Native American tribes and related entities seeking to enjoin the New York Department of Financial Services (NY DFS) from interfering with the tribes’ online payday lending activities. Otoe-Missouria Tribe of Indians v. N.Y. St. Dept. of Fin. Servs., No 13-5930, 2013 WL 5460185 (S.D.N.Y. Sept. 30, 2013). In August, the NY DFS sent letters to 35 online lenders, including lenders affiliated with Native American tribes, demanding that they cease and desist offering loans to New York borrowers that allegedly violate the state’s 16% usury cap. The plaintiffs filed suit, claiming a right to market and sell short-term, high-interest loans to New York residents via the Internet and that the NY DFS’s actions violate the plaintiffs’ inherent sovereignty and the Indian Commerce Clause of the U.S. Constitution. Citing prior analysis from a Colorado appeals court and the Tenth Circuit, as well as the undisputed facts that the New York DFS’s actions are directed at activity involving New York residents in New York, the court rejected the plaintiffs’ contention that the targeted online lending activity occurs on the tribes’ lands. The court held that the plaintiffs failed to identify an applicable “express federal law” prohibiting the state’s activity and that the tribes are subject to the state’s anti-usury laws. The court denied the plaintiffs’ motion for preliminary injunction and ordered the parties to begin discovery.
On September 26, the CFPB denied three tribal lenders’ joint petition to set aside civil investigative demands (CIDs) issued in June 2012. The CIDs were issued in connection with the Bureau’s investigation into several lenders that offer a variety of online small-dollar credit products, including payday loans, installment loans, and lines of credit. The July 2012 petition primarily argued that the CFPB does not have jurisdiction over the three lenders, which are organized and chartered under the “sovereign authority of federally recognized Indian Tribes with longstanding traditions of tribal independence.”
The CFPB’s decision and order rejects the lenders’ claim that the CFPB lacks authority over tribally-affiliated entities under the Consumer Financial Protection Act, stating that the Supreme Court has “long established” that generally-applicable federal statutes apply to Indian tribes, individual Indians, and tribally-affiliated entities. Moreover, in explaining why certain exceptions would not apply to this general rule, the Bureau noted that it “has reason to believe that the Lenders are making loans to non-Indians over the internet, and it seeks to investigate those lending practices for compliance with Federal consumer financial laws.” The decision and order likewise rejects the lenders’ claim of tribal sovereign immunity, finding that “[e]very court of appeals to address the issue has agreed that Indian tribes, like individual States, do not enjoy immunity from suits by the federal government.”
The lenders’ petition also raised procedural challenges, argued that the requests were vague, overly broad, and unduly burdensome, and sought to incorporate by reference arguments from another entity’s motion to set aside a separate CID. The CFPB rejected all arguments as lacking merit and further announced that it will not consider incorporated arguments going forward. While directing the three tribal lenders to comply with the CIDs within 21 calendar days, the Bureau also noted that the tribal lenders were welcome to continue to discuss issues regarding the scope and burden of individual interrogatories and document requests with the Bureau’s enforcement team.
In an article published earlier this year, BuckleySandler attorneys Amanda Raines and A.J. Dhaliwal analyze the reasoning behind previous decisions to deny such petitions and identify issues that companies must be cognizant of while navigating the investigation and petitioning phases.
On September 17, FDIC Chairman Martin Gruenberg responded to a letter sent recently by Republican members of the House of Representatives, in which the members objected to the agency’s approach toward online lending and the banks that process payments on behalf of online lenders. In his response letter, Chairman Gruenberg explains the FDIC’s approach to the issue, describes the challenges for banks who do business with online lenders and third party payment processors, and promises “ a Financial Institution Letter . . . to make it clear that the FDIC’s focus is the proper management of the banks’ relationships with their customers, particularly those engaged in higher risk activities, and not underlying activities that are permissible under state and federal law.”
On September 26, the FTC announced that it had filed an amicus brief in the U.S. Court of Appeals for the Seventh Circuit in a class action suit against a Native American payday lender. In that case, the putative class is challenging a payday lender’s practice of requiring borrowers to submit to arbitration at a Native American reservation in South Dakota. The FTC notes that it is pursuing its own action against the same lender, challenging its jurisdiction over borrowers who do not belong to the tribe and who do not reside on the reservation or in South Dakota. In its Seventh Circuit filing, the FTC argues that Native American tribes and tribal courts have legal authority over their own members and not over non-members, unless non-members conduct activities inside the reservation or enter into a commercial relationship with the tribe or a member of the tribe. The FTC claims that borrowers who take out payday loans from these companies via the Internet do not conduct business on the reservation and should not be subject to arbitration there.
On September 18, Alabama Governor Robert Bentley announced new State Banking Department regulations that will create a state database of payday loans made to borrowers. Under the Alabama Deferred Presentment Services Act (DPSA), payday lenders are prohibited from making loans to borrowers with more than $500 in outstanding payday loan debt. According to the announcement, the Governor believes that the database is needed to enforce this restriction because lenders and borrowers can easily exceed the $500 limit by obtaining loans from multiple lenders. The regulations also implement other aspects of the DPSA, including a payday lender licensing regime. The database is expected to be operational by January 2014. Following the Governor’s announcement, a group of payday lenders reportedly filed suit in Montgomery County Circuit Court to prevent the state from implementing the database provisions. According to reports, the lenders argue that (i) the Banking Department is trying to create the database by regulation after it failed to obtain legislative authority to do so, (ii) the database is discriminatory because it does not apply to other lenders, such as banks and online lenders, and (iii) the state is unlawfully imposing a tax by charging payday lenders a fee to access the database.
During a September 12 House Financial Services Committee hearing and in a recent interview published in the Washington Post, CFPB Director Richard Cordray made a number of statements that shed light on a wide range of topics related to the agency’s thinking and priorities. As discussed in more detail below, Director Cordray and House committee members touched on, among other things, the status of the CFPB’s small business lending data and HMDA rules, efforts to implement the CFPB’s mortgage rules (in particular the QM rule), small-dollar lending, and the CFPB’s collection and use of consumer information.
In addition, in his interview with the Washington Post, Director Cordray confirmed that the CFPB will be writing rules that apply the Electronic Fund Transfer Act (EFTA) to prepaid cards and govern debt collection practices. He also promised additional enforcement actions against debt collectors and “activity” on payday lending.
Highlights from House Hearing:
- Mortgage Rule/QM Implementation and Impact: A number of committee members from both sides of the aisle raised concerns about the impact of the CFPB’s mortgage rules, particularly its ATR/QM rule. Members are concerned with the complexity and regulatory burden of the rules, and that the ATR/QM rule is drawn too narrowly and will limit credit availability. The concerns of community bankers were again front and center—members stated that the rules unnecessarily burden community bankers and limit their ability to make loans, which may, in turn, force them to exit the mortgage market. Mr. Cordray described the various changes to the ATR/QM rule designed to accommodate community banks, reviewed the CFPB’s implementation process and resources, and pledged to continue to work to inform bankers of those accommodations and resources. More broadly, however, he stated that most institutions have told the CFPB that they will be in substantial compliance when the rules take effect in January 2014 and he did not indicate any intention to delay the effective dates of any of the mortgage rules. Read more…
Tribes Seek to Halt New York Internet Lending Investigation; Meet with DOJ on Parallel Investigation
On August 21, two Native American tribes and related entities announced a lawsuit against the New York Department of Financial Services (DFS) in response to its recent effort to halt the offering of online payday loans to New York borrowers. On August 6, the DFS, among other related actions, sent letters to 35 online lenders, including lenders affiliated with Native American tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. The tribes argue that the DFS actions are “intimidation tactics” that will deny the tribes’ rights as sovereign entities and will result in irreparable injury to the tribes absent injunctive relief. The tribes claim that the investigation already has led to “significant harm” to tribes’ business relationships, which impacts the funding of tribal government operations. The suing tribes also met with the DOJ on August 21 regarding its Internet lending enforcement activities. The tribes sent a follow up letter quoting DOJ officials who reportedly stated they are concerned only with financial fraud, and that the DOJ’s actions are not aimed at tribal short-term lending businesses. The letter also indicates that tribal governments will join the Financial Fraud Enforcement Task Force’s Consumer Protection Working Group.
The interest of regulators and enforcement authorities in short-term, small-dollar credit products – including payday loans, advance deposit products, installment loans, and more – has intensified in 2013. State and federal authorities have taken numerous actions to enforce existing law and to develop new rules for these products.
Earlier this year we reported on the DOJ’s prioritization of this area of consumer finance, and we have since reported on many other state and federal developments, including those related to state enforcement of licensing and usury laws against online lenders, federal regulators’ scrutiny of advance deposit products and payday loans, congressional interest in small dollar loans (here and here), and the Department of Defense’s potential expansion of the Military Lending Act.
With regard to this last issue, BuckleySandler Partners Kirk Jensen and Valerie Hletko recently examined the DOD’s advance notice of proposed rulemaking related to installment loans used by members of the armed forces and their families. The authors point out that the DOD’s interest in installment loans is emblematic of the scrutiny of short-term, small-dollar credit products, which appear to be increasingly vexing to regulators who recognize widespread demand for them but are concerned that such products may create a high-cost borrowing cycle.
On August 6, the New York Department of Financial Services (DFS) sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. The letters demand that within 14 days the companies confirm that they are no longer soliciting or making payday loans in excess of the state usury caps. Under New York law, it is civil usury for a company to make a loan or forbearance under $250,000 with an interest rate exceeding 16% per year, and a criminal violation to make a loan with an interest rate exceeding 25% per year. The letters also remind recipients that it is illegal to collect on loans that exceed the usury cap; a separate letter to third-party debt collectors included the same notice. The DFS previously warned third-party debt collectors about collecting on illegal payday loans in March. In addition, the Department of Financial Services sent letters to 117 banks and NACHA requesting that they work with the DFS to create a set of model safeguard procedures to deny ACH access to the targeted lenders and provide the DFS with information about steps the institutions are taking to halt the allegedly illegal activity.
The role of banks in processing payday loan payments was identified as an enforcement priority earlier this year by the DOJ’s Financial Fraud Enforcement Task Force. The DOJ, the CFPB, and other federal agencies reportedly have issued subpoenas to banks and other entities as part of a broad investigation of online payday lending.
On July 29, Georgia Attorney General (AG) Sam Olens announced a lawsuit against a payday lending operation affiliated with a Native American Tribe for allegedly making illegal loans in that state. The AG asserts that the state’s Pay Day Lending Act specifically prohibits the making of payday loans, including the making of payday loans to Georgia residents through the Internet. The AG alleges, based on an investigation conducted after receiving numerous consumer complaints, that (i) the payday lender makes high interest payday loans to Georgia consumers over the Internet despite not having a license to lend in that state, (ii) the lender has continued to electronically withdraw funds from consumers’ bank accounts even after the consumers have repaid the full amount of the principal on the loan, and (iii) the loan servicer has harassed consumers with repeated telephone calls, obscene and abusive language, threats of wage garnishment or other legal action. In his complaint, the AG rejects claims by the defendants that their lending activities are governed solely by tribal laws, stating that only Georgia law governs loan agreements with Georgia borrowers. According to the AG, efforts to resolve the issue without litigation were undermined by the defendants’ continuing illegal activity. The AG is seeking (i) to enjoin the operation from making or collecting on any loans, (ii) a declaration that any pending loans are null and void, and (iii) civil penalties and attorneys’ fees. Georgia is among several states, in addition to the FTC, to take action against this operation. For example, earlier this month Minnesota Attorney Lori Swanson filed suit a similar suit against the same operation targeted by the Georgia suit.