Patrick Siegfried is the author of usurylawblog.com and smallbusinessfinancelaw.com. Patrick is a practicing attorney in Bethesda, Maryland. Patrick’s work focuses on issues regarding alternative small business financing. He can be reached at psiegfried@usurylawblog.comArticles by Patrick Siegfried
Lenders Subject to Section 1071 of Dodd-Frank May Find Silver Lining in CFPB’s Roll Out of New HMDA Rules
October 23, 2015
Last week, the CFPB finalized its update to the reporting requirements of the Home Mortgage Disclosure Act (HMDA) regulations. Under the new rules, the CFPB expects that the number of non-depository institutions that will be required to report may increase by as much as 40 percent. This will lead to a sizable increase in the total number of records reported.
Given the breadth of the new rules and the additional compliance efforts they will require, the CFPB has set January 1, 2018 as the effective date of the new regulations. Given that the Bureau could have chosen January 1, 2017 as the effective date, the longer lead time is welcome news for many in the mortgage industry.
The longer lead time may also be positive news for small business lenders that will be subject to the new Small Business Data Collection rule required by the Dodd-Frank act. Section 1071 of the act requires the CFPB to issue implementing regulations. The Bureau has yet to begin its work on the new rule but some small business lenders have already voiced concerns about the costs of other regulations implemented pursuant to Dodd-Frank. They argue that these costs have already begun to restrict access to small business credit.
A well-timed roll out of the new data collection rule could reduce some of these costs. Having adequate time to develop and implement regulatory compliance procedures in a cost-effective manner will lessen the financial impact to small business lenders. This in turn will allow lenders to minimize the new rule’s impact on credit availability to small businesses.
Once the Small Business Data Collection rule is finalized, small business lenders should be given a sufficient period to adjust to the new requirements, just as the CPFB has done for mortgage lenders with the new HMDA rules. HMDA was enacted in 1975 and lenders have been subject its reporting rules for decades. Yet the increased reporting requirements of the revised rules more than justify a two year lead period.
A similar lead period is just as, if not more important for the small business lenders that will be subject to the new data collection rule. The Dodd-Frank act was enacted just five years ago and requires reporting about small business lending that has never been required before. Lenders will need adequate time to develop the new systems required to meet their reporting obligations.
The CFPB’s conscientious roll out of the HMDA revisions is a rare regulatory silver lining. Let’s hope small business lenders get one too.
Former SBA Administrator Applauds Growth of Alternative Small Business Lending, Says Loan Brokers are Under Watch by Regulators
October 21, 2015
Former SBA Administrator Karen Mills spoke at the LendIt Europe Conference yesterday. The title of her speech was “The State of Small Business Financing in the U.S.” In her talk, Ms. Mills summarized the negative effects that the last economic recession had on small business lending in the U.S. and how alternative small business lenders have played a large role in countering these effects and expanding access to credit.
Ms. Mills urged alternative lenders to continue product innovation to meet the varying needs of small business customers. She stated that she believes that product innovation will be a key differentiating factor among industry participants and a critical component of market success. To that end, she echoed the views of many industry commentators that regulators should allow the marketplace to mature and develop before implementing a new regulatory framework.
“I believe this is a nascent market that is serving a need that small businesses have. These entrepreneurs have found a gap in the market and they are filling it in a cost effective way… The industry should get together and the industry should self-regulate.” Ms. Mills stated.
Ms. Mills did note, however, that some regulators are concerned about certain aspects of the small business finance marketplace.
“In the U.S., we’ve seen the rise of the loan broker. This may or may not be good news.” Ms. Mills stated.
She went on to note that loan brokers were a group that were “under some watch” by policymakers. Ms. Mills’ comments are similar to those she made at the LendIt U.S. conference earlier this year but appear to be the first time she has specifically referenced the monitoring of loan broker activity.
Chairman of House Financial Services Committee Requests Information from CFPB on Fair Lending Enforcement Actions, Requests Interview with Director of Fair Lending Office
October 18, 2015
Earlier this month, the Chairman of the House Financial Services Committee, Rep. Jeb Hensarling (R., Texas), sent a letter to the CFPB requesting information related to the Bureau’s recent investigations in to alleged fair lending law violations by auto lenders. This information may be helpful in understanding how the Bureau conducts fair lending focused exams and investigations. The Bureau recently announced plans to conduct its first small business lending focused exams within the next year.
Chairman Hensarling’s letter was co-signed by Rep. Sean Duffy (R., Wis.) and requests emails and other records that document how the Bureau built its recent cases against Ally Financial, American Honda Finance Corp and Fifth Third Bancorp. In each of these cases the CFPB alleged that the companies pricing policies resulted in minorities being charged more than white borrowers. In the three actions, the lenders did not admit or deny wrongdoing.
Chairman Hensarling’s letter also asks if the Bureau will make the director of the CFPB’s Office of Fair Lending and Equal Opportunity, Patrice Ficklin, available for a transcribed interview. An interview may provide lawmakers additional insight in to the Bureau’s efforts to address allegedly discriminatory pricing policies.
Ms. Ficklin recently spoke at the ABA’s Consumer Financial Services Institute where she explained that she expects the Bureau’s upcoming small business lending focused exams to provide the CFPB with useful information about small business loan underwriting criteria. Ms. Ficklin said that this information will assist the Bureau as it begins its work on the small business lending data collection regulations required by Section 1071 of Dodd-Frank.
Chairman Hensarling’s letter requested a response on Ms. Ficklin’s availability by Oct. 13 and the other requested documents by Oct. 20.
Whoops! Lender Drafts Choice of Law Clause with Wrong State; Court Finds Interest Rate Usurious
October 9, 2015
A recent case out of Illinois serves as a reminder that when it comes to usury law compliance, its always best to double, or even triple check your contracts.
Preferred Capital Lending, a Nevada company that provides cash advances to attorneys working on personal injury cases, agreed to make a loan to the defendant. The defendant signed the promissory note in Preferred Capital’s Las Vegas office and the note expressly provided that it was executed in the State of Nevada. When the defendant later defaulted on the loan, Preferred Capital filed a breach of contract action in Nevada. The case, however, was transferred to Illinois pursuant to the loan contract’s choice of law clause which provided that that state’s law would govern.
In response to the complaint, the defendant filed a motion for summary judgment arguing that the loan carried an interest rate that exceeded Illinois’ usury cap. Preferred Capital countered that it had made a mistake when drafting the choice of law clause and that the clause should have stated that Nevada’s law applied. The court was unpersuaded by Preferred’s argument:
Preferred Capital contends that the Illinois choice-of-law provision was a mistake and the loan documents should have indicated that the law of Nevada, which has repealed its usury laws, applies to the loan documents. This assertion rings hollow in light of the fact that Preferred Capital analyzed its breach of contract claim under Illinois law in its opening motion for summary judgment, and expressly stated in a footnote that it was doing so pursuant to the Illinois choice-of-law provision in the promissory note at issue.
As a result, the court applied Illinois law and found that the amount of interest provided in the agreement violated the Illinois Interest Act.
Now to be fair, Preferred Capital operates offices in both Nevada and Illinois. So its understandable how a Illinois choice of law clause appeared in the loan documents. What’s less clear, though, is why Preferred Capital initially argued that the agreement should be governed by Illinois law given that it had originally filed the matter in Nevada. In any event, the oversight proved costly as Preferred Capital now finds itself defending a usury claim rather than collecting on the outstanding loan.
Preferred Capital Lending v. Chakwin, 2015 U.S. Dist. LEXIS 137383 (N.D. Ill. Oct. 7, 2015)
Creditor Fails to Navigate Usury Law “Minefield”, Ordered to Refund $1.3 Million to Debtor
October 5, 2015
A recent court decision demonstrates the complexity and dangers faced by creditors attempting to navigate California’s usury laws. In the case, a lender agreed to purchase a debtor’s promissory note from a bank and refinance it for a lower amount. The entity that the lender used to purchase the note from the bank was a licensed California real estate broker. Simultaneously with the purchase of the note by the first entity, the lender assigned the note to a second entity under its control. Later the debtor defaulted on the note and filed bankruptcy.
In the bankruptcy proceeding, the lender filed a claim against the bankruptcy estate for the remaining amount due on the note. The debtor objected to the claim and argued that the interest rate that had been charged by the lender was usurious. As such, the debtor asked that the court order the lender to refund the usurious interest that had been paid.
While the lender agreed that the rate charged on the note exceeded the maximum rate set by California’s usury law, the lender argued that the purchase of the note had been arranged by a licensed real estate broker and therefore the transaction was exempt from the usury restrictions. After a two day trial, the court found in favor of the debtor and order the lender to refund over $1.3 million to the debtor.
In its decision, the court noted that the California legislature had provided an exemption from the applicability of California’s usury laws by exempting “any loan or forbearance made or arranged” by a licensed real estate broker and secured by real estate. The court went on to explain, however, that the exemption only applies where the broker was acting on behalf of another. Where a broker is acting as a principal, the exemption does not apply.
After examining the relevant loan documents, the court found that the purchase of the note by the first entity had been done on its own behalf and not on behalf of the entity to which the note was later assigned. The court rejected the lender’s argument that the lender had done little to formally structure the transaction as a broker-principal arrangement simply because it controlled both entities and knew it would be transferring the note following the purchase from the bank. For that reason, there was no “need to report anything to [itself]”. The court was unpersuaded by this argument and stated that “[t]he usury laws present a minefield that people in the [lender’s] position, with their… status as licensed brokers, can readily navigate. This time they did not navigate carefully.”
In light of this case, lenders doing business in California should be careful to “navigate carefully” the complex usury laws of that state, lest they too become a victim of its “minefield” of statutory dangers.
In re Arce Riverside, LLC, 2015 Bankr. LEXIS 3275 (Bankr. N.D. Cal. Sept. 28, 2015)
CFPB to Begin Work on Small Business Loan Data Collection Rule After Completion of HMDA Revisions; Plans ECOA Examinations Within the Next Year
September 30, 2015CFPB Director Richard Cordray testified yesterday before the House Financial Services Committee. During the session, Director Cordray was asked when the Bureau plans to begin work on its implementation of the Small Business Loan Data Collection Rule of section 1071 of the Dodd-Frank Act. Noting the recent calls for implementation of the rule by members of Congress and a number of community groups, Mr. Cordray stated that the Bureau plans to begin work on the rule following the completion of its overhaul of the Home Mortgage Disclosure Act rules. He stated he expected the Bureau to finish the revisions to the HMDA regulations by the end of the year.
Mr. Cordray also noted that the CFPB plans to begin examinations of financial institutions regarding their compliance with the Equal Credit Opportunity Act as it relates to small business lending. “We have a little window of authority [over small business lending] under the Equal Credit Opportunity Act and we have indicated that we will begin examinations of institutions on their small business lending within the next year,” he said. ECOA is one of the few statutes applicable to small business lenders that is enforced by the CFPB.
The Director’s statement follows the Bureau’s recent ECOA enforcement action against Hudson City Savings Bank for alleged redlining in its consumer lending operations in New Jersey, New York, Connecticut, and Pennsylvania. Given the Bureau’s recent and controversial use of the disparate impact theory, it will be interesting to see if the Bureau expands the use of the theory when it begins its examination of institutions regarding their small business lending operations.
New Hampshire Attorney General Takes Action Against Two Out-of-State Credit Card Processors
September 27, 2015
On September 22, 2015 the Attorney General of New Hampshire announced that it had entered in to an agreement with two credit card processors to settle allegations that both companies had engaged in unfair or deceptive business practices in violation of New Hampshire law. The allegations stemmed from the processors’ solicitations of New Hampshire businesses for credit card processing and other ancillary services. The AG cited the companies’ telephone solicitations as the primary focus of its investigation:
These solicitations were conducted through a pre-approved script that failed to identify the legal name of the company and failed to inform consumers that the company making the calls is located in the state of Florida. In addition, the script failed to provide a phone number for consumers to call back with any follow-up questions or concerns. Further, the script characterized the offer being made as an “upgrade” of the existing payment processing equipment, when, in fact, the solicitations were an attempt to identify new customers to enroll in new services. Finally, the script made several references to a “free” replacement of card payment processing equipment without clearly communicating to the consumers that the new equipment was conditioned on purchasing and remaining enrolled in their services.
Under the terms of the agreement, both processors have agreed to cease soliciting in New Hampshire until they are registered with the Secretary of State. They will also have to receive approval from the AG’s office on a revised script before resuming telephone solicitations. In addition, they are required to pay $5,000 to the state in lieu of a civil penalty and must reimburse the state’s investigation costs.
Unfortunately, the AG’s announcement provides little guidance to other businesses soliciting New Hampshire customers as it fails to specify which of the cited acts it believes are unfair or deceptive. While some of the allegations in the announcement suggest that the AG believed that portions of the solicitations were misleading and potentially deceptive, others are fairly innocuous omissions of information, e.g. failing to identify the legal name of the calling company and its location. It’s unclear whether the AG considers these omissions to be unfair or deceptive on their own or when considered in conjunction with the processors allegedly misleading characterizations of “upgrade” and “free”.
In light of the AG’s announcement, companies soliciting potential New Hampshire customers may want to consider modifying their sales scripts to include the legal name of their business, the state in which they are located and a call-back number.
Lender Successfully Compels Arbitration in Response to Usury Complaint
September 23, 2015
CashCall and its affiliates haven’t fared particularly well in their recent efforts to dismiss complaints filed against them by state regulators. They found some success, however, in their recent efforts to dismiss a private usury action filed against them in Kentucky Federal Court.
The plaintiff in the case received a payday loan from the defendants that she argued was usurious and, therefore, void. CashCall countered that the agreement contained a clause that required all disputes between the parties to be submitted to an arbitration conducted by the Cheyenne River Sioux Tribe. As such, CashCall argued that the lawsuit should be dismissed or stayed pending arbitration.
The plaintiff countered that the arbitration clause was a sham and illusory. She alleged that the tribal forum laid out in the agreement didn’t exist and, therefore, the arbitration clause was unenforceable. She also cited to a number of cases that had found arbitration clauses contained in other CashCall agreements void.
After reviewing the parties’ positions, the court sided with CashCall. The court noted that in the cases cited by the plaintiff, the agreements had required that the arbitration proceedings be conducted by a member or members of the CRST tribe. In the agreement at issue, however, the arbitration clause provided that the plaintiff could also choose other organizations to conduct the arbitration, including AAA and JAMS. Because the plaintiff was permitted to choose an established organization to conduct the arbitration rather than members of the CRST, the court found that the agreement was not illusory and should be enforced. Therefore, the court granted CashCall’s motion to compel arbitration and dismissed the case.
Yaroma v. CashCall, Inc., 2015 U.S. Dist. LEXIS 123457 (E.D. Ky. Sept. 16, 2015)
