Legal Briefs
WebBank Alleged to be “Sham Pass Through Bank” in New Lending Club Usury Class Action
April 15, 2016
A new class action lawsuit filed on April 6th alleges that Lending Club and WebBank among others, violated state usury laws, consumer protection laws and the Racketeer Influenced Corrupt Organizations Act (“RICO”).
Plaintiff Ronald Bethune, a New York resident, is arguing that his 29.97% APR loan through Lending Club violated the state’s 16% interest cap.
While the Second Circuit’s ruling in Madden v. Midland Funding, LLC is cited, the complaint focuses more on WebBank’s role in carrying out a collaborative fraud scheme.
Defendants associated together for the common purpose of limiting costs, eliminating oversight, and maximizing each members’ profits by engaging in the fraudulent conduct described herein. Specifically, the members of the Enterprise enticed tens of thousands of consumers to sign up for loans through LCC [LendingClub Corporation], hoping that enough consumers would select LCC for their loans without the fact that WebBank was a “pass through” sham party to the transaction being brought to light making the loans illegal and usurious. The purpose was to allow Defendants to charge, and profit from, usurious interest rates to Plaintiff and members of the Class, and to do so without regulatory oversight.
The plaintiff acknowledges that Lending Club recently adjusted its relationship with WebBank and the class seeks to recover damages for all loans made prior.
WebBank’s parent company, Steel Partners Holdings LP, who is also named as a co-defendant, has barely registered any movement in its stock price.
Lending Club by contrast, is down almost 10% since the complaint was filed.
YOU CAN DOWNLOAD THE FULL CLASS ACTION COMPLAINT HERE
This case is unrelated to another pending class action against Lending Club.
Plot Twist: Obama Administration to Comment on Madden v Midland
March 22, 2016
The U.S. Supreme Court wants to know what the Obama administration thinks of the Madden v Midland case.
The potential impact of Madden v Midland on marketplace lending was finally starting to fade away until the U.S. Supreme Court made an unexpected move yesterday. “The Solicitor General is invited to file a brief in this case expressing the views of the United States,” the docket states. At issue is the scope of preemption under the National Bank Act (i.e. can you buy a loan issued by a nationally chartered bank that legally circumvented state usury laws at the time it was originated and still enforce the interest rate?)
The Solicitor General is responsible for arguing cases on behalf of the U.S. government in the U.S. Supreme Court. The position is appointed by the President and confirmed by the Senate. That seat is currently filled by Donald B. Verrilli, Jr., an Obama appointee and the man credited with saving Obamacare. He was the attorney that helped persuade the Supreme Court to treat the individual mandate of the Patient Protection and Affordable Care Act as a tax and not as an exercise of Congress’s power under the Commerce Clause.
Any brief filed is bound to become politically significant since the Obama Administration is on its way out. Therefore any views it expresses in the next few months may not be the same views of the next administration scheduled to be sworn in ten months from now.
Madden v Midland will have no bearing on merchant cash advances and little if any bearing on commercial marketplace lenders. That’s because most not only work with state chartered banks instead of nationally chartered banks, but also face more favorable state usury laws since they do not lend to consumers.
Ohio Considers Regulation of Confessions of Judgment
March 20, 2016
In a commercial lending context, courts and legislatures have generally assumed that the parties to the agreement have relatively equal bargaining power. Because of this understanding – that a business borrower is more sophisticated than a consumer borrower – regulation has been more “hands off” with regard to the terms commercial loans may contain. One such clause frequently found in commercial loan agreements is a confession of judgment clause, also called a cognovit judgment. A confession of judgment is written authorization by the borrower directing the entry of a judgment against him in the event he defaults on payment. A confession of judgment clause in a loan agreement permits the creditor on default to appear in court and confer judgment against the borrower.
Interestingly, Ohio is now considering legislation to regulate the use of the confession of judgment in a commercial loan agreement. House Bill 291 would require attorneys for creditors to include in a petition for confession of judgment the borrower’s last known address so that the borrower can be advised of the creditor’s decision to execute on the confession of judgment. Such notice gives the borrower the opportunity to dispute the execution on the confession of judgment clause. It would further provide that a confession of judgment be made “only for nonpayment of principal and interest under the terms of an instrument evidencing indebtedness,” which would eliminate the ability to obtain other damages. It also bans the use of the clause for something other than a nonmonetary default, which some Ohio courts have allowed. For example, in Fifth Third Bank v. Pezzo Construction, an Ohio appellate court allowed execution on a confession of judgment where the borrower failed to pay all taxes when due as required by the loan agreement. Another court rejected such use of confessions of judgment in Henry County Bank v. Stimmels, Inc. House Bill 291, if adopted, would make clear that only payment defaults can result on a confession of judgment.
House Bill 291 is not yet scheduled for a hearing.
Lending Club Class Action Lawsuit Predicated on Madden v Midland Risk
March 2, 2016UPDATE: This case is unrelated to another class action filed against Lending Club on April 6th
Lending Club is the latest publicly traded online lender to get hit by a shareholder class action lawsuit (OnDeck was first). Filed in the Superior Court of the State of California, plaintiff alleges in the complaint that Lending Club misleadingly concealed the fact that:
- Lending Club had an unsustainable business model that was predicated on it being able to issue loans with extremely high and/or usurious rates across the country
- that their loan investors would not be able to enforce the extremely high and/or usurious rates imposed by Lending Club because they violated state usury laws
- that without the extremely high and/or usurious rates, the loans generated through Lending Club’s marketplace would not be attractive to investors because the loans had very high credit risk and were subject to issues concerning insufficient documentation
- that a substantial portion of its loans were issued with rates in excess of those allowed by applicable state usury laws
The action seeks “recovery, including rescission, for innocent purchasers who suffered many millions of dollars in losses when the truth about Lending Club emerged and the its stock price plummeted.”
Among the Defendants is former US Treasury Secretary Larry Summers.
The complaint alleges that the truth about Lending Club began to emerge after “the Second Circuit affirmed [in Madden v Midland] that the business model used by Lending Club was not valid because loans sold by banks to non-banks, third parties (such as Lending Club and its investors) are not exempt from state usury laws that limit interest rates.”
–In actuality, no such affirmation was made. Lending Club does not specifically use Midland Funding’s business model and the case was not about Lending Club, nor was Lending Club mentioned in it.
“Specifically, the Second Circuit observed that assignees and third-party debt buyers could not rely on the National Bank Act to export interest rates that were legal in one state but usurious in another, to the states where those rates were impermissible,” the complaint states.
–Perhaps, but Lending Club’s bank makes loans under the Federal Deposit Insurance Act, not the National Bank Act.
As supporting evidence, the complaint cites statements from Moody’s analysts, Morgan Stanley, Cross River Bank CEO Gilles Gade, and Lending Club CEO Renaud Laplanche himself in a quarterly earnings call.
While the impact of Madden v Midland has been seriously overblown, Lending Club’s stock has no doubt taken a beating since its IPO. The complaint states a loss of 43% from the original offering price. Among the defendants are:
- LendingClub Corporation
- Renaud Laplanche
- Carrie Dolan
- Daniel Ciporin
- Jeffrey Crowe
- Rebecca Lynn
- John J. Mack
- Mary Meeker
- John C. (Hans) Morris
- Lawrence Summers
- Simon Williams
- Morgan Stanley & Co. LLC
- Goldman, Sachs & Co.
- Credit Suisse Securities (USA) LLC
- Citigroup Global Markets Inc.
- Allen & Company LLC
- Stifel, Nicolaus & Company, Incorporated
- BMO Capital markets Corp.
- William Blair & Company, L.L.C.
- Wells Fargo Securities, LLC
NOTE: This case is unrelated to another class action filed against Lending Club on April 6th
Federal Usury Caps Unlikely After CFPB Statements
February 15, 2016
Business lenders and merchant cash advance companies can breathe a little earlier since David Silberman, the CFPB’s acting deputy director, said at a House hearing that federal usury caps were off the table for the nation’s most controversial form of lending, payday loans. “We will not establish a usury cap and interest-rate limits on these or any other lending product,” Silberman said. “We have not contemplated doing so and we will not do so.”
This should quell speculation that CFPB involvement or regulatory activity in other areas of lending, will eventually include interest rate caps at the federal level. The Dodd-Frank act actually bars the CFPB from setting rate caps but that hasn’t stopped lenders from thinking it might still happen otherwise.
Two years ago, Barney Frank, a co-sponsor of the Dodd-Frank act, said on the record that he himself was against federal interest rate caps when asked if they should exist in business lending.
Meanwhile, presidential candidate Bernie Sanders has proposed a nationwide usury cap of 15% APR. How exactly he would make that a reality, especially since it is unlikely to gain congressional popularity, is uncertain.
Court Refuses to Apply Federal Preemption to Loan Servicer Despite Bank’s Continued Interest in Loan
January 20, 2016
In November 2014, the Pennsylvania Office of Attorney General (“OAG”) filed a complaint against a number of companies that did business with a group of payday lenders. The payday lenders were a Delaware bank and three tribal entities. The defendants provided marketing services and operational support to the lenders and in some instances purchased portions of the loans. In its complaint, the OAG alleged that the defendants, and not the bank or tribes, were the de facto lenders and that their partnership with the bank and tribes were constructed to circumvent Pennsylvania usury laws.
In their motions to dismiss, the defendants argued that, in regards to the loans issued by the Delaware bank, federal law preempted the OAG’s state usury claims. They explained that the Depository Institution Deregulation and Monetary Control Act (“DIDA”) allows state-charted federally insured banks to charge the same interest rate in any state as they are legally permitted to charge in the state in which they are located. The DIDA mirrors the language of section 85 of the NBA.
The defendants argued that because the Delaware bank was a state-charted federally insured bank, the DIDA preempted the causes of action in the OAG’s complaint as they pertained to the defendants’ partnership with the bank. As additional support for their preemption argument, the defendants highlighted the fact that the bank not only originated the loans but also retained them wholly, or at least in part.
Despite the bank’s origination and retention of the loans, the District court rejected the defendants’ arguments. It held that federal preemption only applied to the bank. In support of its holding, the court cited to the Third Circuit’s decision in In re Community Bank of Northern Virginia, 418 F.3d 277, 295 (3d Cir. 2005). In that case, the Circuit court held that state law claims against a non-bank were not preempted by the DIDA or the NBA.
The District court refused to apply federal preemption to the defendants even though the bank retained ownership of all or part of the loans. The court noted that the complaint alleged that the defendants, and not the bank, were the real parties in interest and therefore reasoned that preemption should not apply.
Pennsylvania v. Think Fin., Inc., 2016 U.S. Dist. LEXIS 4649 (D. Pa. 2016)
When it Comes to Usury Law, Be Careful What You Ask For
January 8, 2016
In a previous post, Creditor Fails to Navigate Usury Law “Minefield”, Ordered to Refund $1.3 Million to Debtor, I discussed a recent bankruptcy case in California. In the case, a lender had filed a claim in the borrower-debtor’s bankruptcy case. The debtor objected to the claim and brought a usury claim against the lender for allegedly usurious interest that it claimed it had paid.
After a two day trial on the debtor’s objection to the lender’s bankruptcy claim, the court found in favor of the debtor and ordered the lender to refund the usurious interest it had charged the debtor. The court also ordered post-trial briefing on a number of issues, including:
Are the debtors barred by the two year statue of limitations on usury actions from recovering usurious interest paid prior to the 2 years before the date of the bankruptcy petition?
In its post-trial brief, the lender argued that the California statute of limitations provides that a borrower that commences an usury action against a lender may only recover the amount of usurious interest paid to the lender in the preceding two years prior to filing the complaint. Therefore, the lender argued, the amount that the debtor could recover should be limited to those payments that the debtor had made within the two years preceding the filing of the bankruptcy petition. The court disagreed.
The court first noted that California usury claims generally must be filed within two years of the payment at issue. However, if the lender brings an action on the debt, the borrower may cross complain for recovery of all usurious interest paid, regardless of the two year statute of limitations. The court found that this was also true where a lender files a claim for usurious interest in a bankruptcy proceeding. As support the court cited a recent ninth circuit which explained:
The filing of a proof of claim is analogous to filing a complaint in the bankruptcy case… And a claim objection by the debtor is analogous to an answer… In re Cruisephone, Inc., 278 B.R. 325, 330 (Bankr. E.D.N.Y. 2002) (“In the bankruptcy context, a proof of claim filed by a creditor is conceptually analogous to a civil complaint, an objection to the claim is akin to an answer or defense and an adversary proceeding initiated against the creditor that filed the proof of claim is like a counterclaim.”).
Based on the Ninth’s Circuit holding, the court found that the lender had “‘brought an action’ by filing its proof of claim and actively and aggressively pursuing its remedies in the course of the bankruptcy case, and the usury defenses and claims of the Debtors are in the nature of counterclaims, thus rendering the two-year statute of limitations inapplicable here.” As a result, the debtor was permitted to recover all of the usurious interest that the court had awarded it at trial.
In re Arce Riverside, LLC, 2015 Bankr. LEXIS 4380 (Bankr. D. Cal. 2015)
Getting a California Lender’s License
December 17, 2015Given the fact there have been a number of successful lawsuits against cash advance companies in California, many cash advance companies have decided to take a different route and get a lending license to provide loans to merchants in the state. If done correctly, this can allow companies to provide loans to merchants in California at roughly the same profit margins one could expect from a cash advance. Below I will discuss the process for obtaining a California lender’s license and some tips for making that process less painful.
To start, go to the California Department of Business Oversight and get the form titled “Application for a License Under the California Finance Lenders Law.” The application is long and detailed but don’t let that scare you. Most of the information you provide is really more related to letting the State know about your company and the main people that will be responsible for managing the lending operations. As you complete the form, one thing you do need to do is make sure you are very careful and meticulous as any small mistake will cause the application to be rejected making the process much longer.
The first part of the application requests basic information about your company and its officers. In filling out this and other parts of the application, it is essential to respond to all the questions. If you fail to miss just one response the application will be rejected. To that end, even if a question does not apply to you I find it better to respond “N/A” or “not applicable” rather than just leaving a blank. By doing that you force yourself to fill in every blank and therefore reduce the chances for missing a response resulting in a rejection of your application.
Also, you need to be very precise in your responses. I have experienced a situation where the examiner rejected an application because the name of the company was incorrectly spelled on the application. The name of the company was submitted on the application with “Inc” instead of the complete “Inc.” at the end of the company’s name. The examiners are very good at what they do and very thorough. You need to make sure the packet you submit is perfect and also that there are no inconsistencies in the document.
Another important point to remember is that the application requires you to name the person that will be responsible for running the location where the lending is occurring. The main requirement is that the person running the location must be physically present at the location. As a result, you could not manage a California office remotely from New York for instance. In another twist, if your principal location is out of state, you will need to get the license and fill out the main application for that out of state address. For the California location, you will need to fill out the short form application in addition to the main application and submit the short form application as part of the packet to allow the license to apply to the location in the state of California.
There are a number of exhibits you also have to provide as part of the process. Some of them are simple like a balance sheet for the company. It is acceptable that the company is new and has little in the way of assets. You just have to make sure you attach a balance sheet and that it is prepared in compliance with generally accepted accounting principles. I have seen times when the balance sheet was rejected because there was no line items for liabilities for instance, even though the company was new and therefore had none. It is probably wise to engage your accountant to make sure you submit a balance sheet that complies with those guidelines.
You also have to get a surety bond in the amount of $25,000. There are readily available bonding companies that specialize in providing these bonds. In addition, you need some other exhibits like a statement of good standing for your company, authorization for financial disclosure, social security number (on a separate exhibit), organizational chart and a few other documents. As with the rest of the application the key is to make sure you include everything they are asking for exactly as requested.
The most involved exhibit is the “Statement of Identity and Questionnaire.” That exhibit has to be filled out for each owner, officer and manager listed on the application. It requests detailed information going back 10 years for each person for items like residence address and work history.
In addition, there are a series of questions on topics such as whether the person has been involved in lawsuits, had any licenses revoked or declared bankruptcy. Fingerprints are also taken as part of the process. This part of the application is trying to vet the various people working for the company to make sure they are suitable to be in the lending business.
Once you have all the documents prepared, you need to put them together in a packet to send off to the Department of Business Oversight to be reviewed. Again, I cannot overemphasize how important it is to completely and accurately answer the questions and put the packet together. You need to make sure things are in the proper order and complete. Triple check the application for errors and to make sure that packet is presented in the best manner possible. You also need to determine the amount of fees to submit with the application. Then, send the package by overnight delivery to make sure you have proof of delivery.
So what happens next? Well there is usually a bit of a wait. Typically it takes 3 months or more to get a reply. If you have done your homework, you might get lucky and successfully get your license on the first try. If there are any deficiencies, you will get a response letter from the State detailing the items that need to be corrected in the application and a time frame in which you have to respond or the application is abandoned.
On the first go round, you are usually given at least 2 months so you should have plenty of time. Digest the things they want and provide the required information. The deficiency letters are very detailed so it should be easy to make the requested changes. Resubmit the requested items and wait for the next response. It could be in the form of another deficiency letter but it could be an approval of the license. Just keep on trying until you are finally successful.
That’s it, you are finally a licensed lender in California! But that is where the fun begins. You are subject to many laws in California and audits by the State. To get the right to operate as a licensed lender, you need to make sure you prepare your application correctly. Once you have done that, you need to get all your loan documents drafted in compliance with California law. Make sure you have adequate experience and professional help to take on those tasks.
