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 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.
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.
On December 3, New York Governor Andrew Cuomo announced that the state Department of Financial Services (DFS) sent subpoenas to 16 online “lead generation” companies as part of its expanding investigation into online payday lending. The DFS alleges the target companies are engaged in deceptive or misleading marketing of illegal, online payday loans in New York, and claims lead generation companies offer access to quick cash to encourage consumers to provide sensitive personal information and then sell that information to, among others, payday lenders operating unlawfully in New York. The DFS publicly kicked off an investigation of online payday lending earlier this year when it 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. 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 DFS cites as part of the basis for its expanded investigation consumer complaints about false and misleading advertising (including celebrity endorsements), harassing phone calls, suspicious solicitations, privacy breaches, and other issues.
On November 20, the CFPB announced the resolution of an enforcement action against one of the largest payday lenders in the country. The consent order alleges that the lender and an online lending subsidiary made hundreds of payday loans to active duty military members or dependents in violation of the Military Lending Act, and that call center training deficiencies have allowed additional loans to be originated to spouses of active-duty members. The order also alleges unfair and deceptive debt collection practices, including so-called “robosigning” that allegedly yielded inaccurate affidavits and pleadings likely to cause substantial injury. In July, the CFPB issued a notice that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.
Notably, this is the first public action in which the CFPB alleges that the supervised entities engaged in unlawful examination conduct. The Bureau asserts that the lender and subsidiary failed to comply with examination requirements, including by not preserving and producing certain materials and information required by the CFPB. Both the lender and its subsidiary are nonbanks and have not previously been subject to regular federal consumer compliance examinations; the CFPB does not allege that the exam failures were intentional violations potentially subject to criminal charges.
Pursuant to the consent order, the lender must pay $8 million in consumer redress, in addition to the more than $6 million the lender has already distributed to consumers for alleged debt collection and MLA violations. The lender also must pay a $5 million civil money penalty. The CFPB did not reveal how it determined the penalty amount or what portion of the fine is attributable to the alleged consumer-facing violations versus the alleged unlawful exam conduct. Finally, the order requires comprehensive compliance enhancement and imposes ongoing reporting and recordkeeping obligations for a period of three years.
In written remarks released by the CFPB, Director Cordray stated: “This action should send several clear messages to everyone under the jurisdiction of the Consumer Bureau. First, robo-signing practices are illegal wherever they occur, and they need to stop – period. Second, violations of the Military Lending Act harm our servicemembers and will be vigorously policed. Third, the Bureau will detect and punish entities that withhold, destroy, or hide information relevant to our exams.”
On November 13, the CFPB filed an amicus brief in a Second Circuit case stemming from efforts of the New York Department of Financial Services (DFS) to crack down on lenders offering allegedly illegal payday loans. Certain online lenders affiliated with Native American tribes sought to enjoin the DFS from interfering with their payday lending activities, claiming that the state’s actions violate the tribes’ inherent sovereignty and the Indian Commerce Clause of the U.S. Constitution. The federal district court denied relief last month, holding 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, which the plaintiffs’ appealed.
In its amicus brief, the CFPB urges the court to reject the plaintiffs’ contention that the Consumer Financial Protection Act (CFPA) prevents the state from applying its consumer-protection laws to tribally-affiliated lenders, arguing instead that the CFPA “expressly preserves states’ varying consumer-protection laws as applied here, including those that would outlaw loans with certain terms.” According to the CFPB, “[a]lthough the CFPA recognizes that tribes, like states, have a role in regulating consumer financial products and services, and that the CFPB will coordinate with tribes and states in protecting consumers, that has no bearing on whether tribally affiliated lenders must comply with state laws.”
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 30, the NY AG announced settlements with five companies that collected debts on allegedly illegal payday loans. The AG alleged that the companies collected on behalf of payday lenders who allegedly made illegal loans; under state law, the maximum allowable interest rate is 16% for most lenders not licensed by the state. In August, the NY AG sued 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. In March, the New York Department of Financial Services warned third-party debt collectors that it is illegal to attempt to collect a debt on an illegal payday loan made in New York, even if such loans were made on the Internet, and followed up with a similar warning to lenders in August. The NY AG’s settlement requires the five companies collectively to pay approximately $280,000 in restitution and $30,000 in penalties. One of the companies is required to reverse negative reporting to the credit reporting bureaus related to approximately 8,550 consumer accounts. In addition, all of the companies will be prohibited from collecting on payday loans from New Yorkers in the future.
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 October 3, the U.K. Financial Conduct Authority (FCA) proposed a framework for its regulation of consumer credit when those authorities transfer to the FCA from the Office of Fair Trading on April 1, 2014. As part of the U.K.’s ongoing regulatory reform and restructuring, after that date the FCA will supervise more than 50,000 firms who have existing credit licenses. The FCA proposes, among other things, (i) requiring lenders to conduct affordability checks on borrowers, (ii) requiring clear, fair and not misleading advertisements, and (iii) banning misleading advertisements. The regime would include additional new rules for payday lenders, which would: (i) restrict loan roll-overs to a maximum of two, (ii) require lenders to provide borrowers who roll-over loans with information about debt advice resources, (iii) restrict to two the number of times an automatic payment deduction authority can be used, and (iv) restrict the content of payday lending advertisements. The Consultation Paper is open for comment through December 3, 2013. The FCA plans to publish the final rules and guidance in February 2014.
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.