Legal Briefs
Brief: The CFPB’s Unconstitutionality
December 28, 2016The Director of the consumer agency wields so much power that his authority actually violates Article II of the United States Constitution, according to the United States Court of Appeals for the District of Columbia Circuit which presided over PHH Corp v. CFPB. “In short, when measured in terms of unilateral power, the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President,” the Court wrote. “Indeed, within his jurisdiction, the Director of the CFPB can be considered even more powerful than the President.”
Article II of the Constitution grants the President alone the authority to take care that the laws be faithfully executed. That means that Congress can’t even legally legislate another single individual to possess that amount of power even if they wanted to. But rather than order the dismantling of the CFPB, the Court suggested two remedies, either the director be overseen by the President of the United States or the single-directorship model be reconfigured to become a multi-member commission, a workaround that other executive agencies operate under.
Even though the agency is tasked to protect consumers, the Court recognized the potential for corruption when overseen by a single unaccountable person. “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency,” the Court asserted.
Meanwhile, the CFPB has cast the decision aside as nonsense and has refused to comply, even going as far as to directly rebut it in another case shortly thereafter. In CFPB v. Intercept Corporation, the CFPB argued that the D.C. Circuit’s decision was “wrongly decided” and “not likely to withstand further review.” They’ve also asked the D.C. Circuit to rehear the case in part because they believe the decision “purports to override Congress’s explicit determination to create ‘an independent bureau’ to exercise regulatory and law enforcement authority in a particular segment of the economy.” The Court can simply deny to rehear the case.
One wild card to consider in this debate is that President-Elect Trump has pledged to repeal the Dodd-Frank Act, the law that created the CFPB to begin with. At the very least, Trump may feel it necessary to flex the power granted to him under Article II and subvert the directorship of the agency.
Online Loan Middleman Just As Culpable As the Lenders, Federal Court Rules
November 21, 2016A CFPB lawsuit against a payday loan lead generator survived dismissal last week, despite the US Court in the Central District of California acknowledging the company’s role as a “middle man” in the lending process. T3Leads and several people connected to the company are alleged to have deceived consumers, in part such that “they allowed consumers to be exposed to lenders that could cause them substantial harm.”
The court ruled that T3Leads was a service provider as contemplated by the Consumer Financial Protection Act and is therefore bound to the laws therein. The case will now proceed to discovery.
Notably, the court also agreed with the recent opinion of the D.C. Circuit in finding the CFPB’s structure unconstitutional. Nonetheless they did not believe the remedy was to toss this case or prevent the CFPB from carrying out its operations. Instead, they ruled that the CFPB’s director must report to the President of the United States to come into compliance with Article II of the US Constitution. The CFPB has refused to comply and is already appealing the D.C. Circuit’s decision.
The CFPB’s quest for power however, may come at a cost. That’s because President-elect Trump has pledged to repeal and replace the Dodd-Frank Act, the law through which the CFPB’s power is vested.
Despite the Consumer Financial Protection Act’s exemption on vendors that simply provide advertising space, a decision Google made earlier this year to ban all payday lenders could have something to do with their fear of being labeled a middle man and covered service provider.
CFPB Rebuts its Unconstitutionality
October 21, 2016
The CFPB does not agree with the D.C. Circuit’s ruling that its leadership structure is unconstitutional, according to a reply filed in a separate case in the District of North Dakota. Believing itself constitutionally exempt from oversight by the President of the United States and any checks on its power whatsoever, the CFPB argued that the D.C. Circuit “based its decision on (a) the lack of sufficient historical precedent for the Bureau’s structure, and (b) a policy judgment that multi-member commissions are superior to single agency heads.”
It also suggested that it will be appealing the decision to the U.S. Supreme Court.
Remarkably, the D.C. Circuit Court’s ruling did not even call for the CFPB to be dismantled or have its funding reassigned to Congress, but instead ordered that it fall into line with the structure of other executive agencies where a reasonable system of checks and balances be implemented at the top. As originally created, CFPB Director Cordray was granted unilateral power that neither his agency colleagues or the President of the United States could check. Now, the CFPB appears unwilling to cede such authority.
“The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency,” the D.C. Circuit Court asserted.
Despite that, in CFPB v. Intercept Corporation, et al., the CFPB argued that “decision was wrongly decided and is not likely to withstand further review.”
Embezzler Used Funds to Pay Lending Club Loan
August 14, 2016Brian T. Cisek pled guilty last week to charges of embezzlement and theft of union funds. A postal worker employee and chairman of the Muscular Dystrophy Association Charity Committee operated through the postal union, Cisek embezzled approximately $9,000 from the charity between January 2013 and September 2014.
According to the plea agreement, Cisek at one point duped the union into giving him a $500 advance to pay for various setup costs of the charity’s upcoming golf outing. But once he received the funds, he used them to make an overdue loan payment to Lending Club.
The statutory maximum sentence that the court can impose for his crime is 5 years imprisonment, 3 years supervised release and a fine of $10,000 or twice the gross gain or gross loss resulting from the offense.
The case number is 1:16-cr-00149-RJJ in the Western District of Michigan, Southern Division in the United States District Court.
Madden v Midland Won’t Be Heard By The US Supreme Court
June 27, 2016
The US Supreme Court has decided not to hear the case of Saliha Madden v Midland Funding.
This was to be expected after US Solicitor General Donald Verrilli filed a devastating brief last month on behalf of the United States government that argued the US Court of Appeals for the Second Circuit was incorrect in its ruling. There is “no circuit split on the question presented,” he wrote, and “the parties did not present key aspects of the preemption analysis” to the lower courts.
Vincent Basulto, a partner at Richards Kibbe & Orbe LLP in New York, said “While it is not expected that other circuits will adopt the reasoning of the Second Circuit, in part due to the arguments made by the Solicitor General, the appellate decision stands as good law in NY. The case will return to the district court for further consideration of other issues and there is reason to believe that the outcome there may be favorable for the financial services industry due to a choice of law issue which remains to be decided.”
US Solicitor General Verrilli resigned three days before the Supreme Court’s decision, but his brief on the case will likely be cited for years to come.
“For the foreseeable future,” Basulto added, “parties can be expected to structure their arrangements in an attempt to distinguish the Madden decision from their transaction, though it is not clear how best to do that.”
Merchant Cash Advance Definitely NOT a Loan, New York Judge Rules
June 11, 2016
A New York Supreme Court Justice ruled that a purchase of future receivables is not a loan. And it’s not even close, according to a decision and order by The Honorable Jerome C. Murphy in Platinum Rapid Funding Group Ltd v. VIP Limousine Services, Inc. and Charles Cotton.
As a background, the corporate defendant agreed to sell their future receivables to plaintiff in return for an upfront payment, an arrangement commonly referred to as a merchant cash advance. Defendants breached and plaintiff filed a lawsuit accordingly. Defendants asserted twelve defenses including that plaintiff had committed civil and criminal usury. Plaintiff Platinum Rapid Funding Group then moved to dismiss their defenses.
In a 9-page decision, Justice Murphy dismissed nearly all of the defenses, including the one alleging usury, because as he put it, the agreement was not a loan, so there can be no usury. His ruling on that defense is quoted below:
Defendants’ contention that the Agreements violate General Obligation § Law 5-501[1] and Banking Law § 14-a[1], and are civilly and criminally usurious is without merit. A corporation is prohibited from asserting a defense of civil usury (Arbozova v. Skalet, 92 A.D.3d 816 [2d Dept. 2012]). An individual guarantor of a corporate obligation is also precluded from raising such a defense (Id.). Defendants have failed to adequately allege a defense of criminal usury in violation of Penal Law § 190.40, in that they failed to allege that the lender knowingly charged, took or received annual interest exceeding 25% on a loan or forbearance of money. In its bill of particulars, defendant hypothesizes that the terms of the Agreement could result in the payment of criminally excessive interest, but this is clearly insufficient under the pleading requirements.
Essentially, usury laws are applicable only to loans or forbearances, and if the transaction is not a loan, there can be no usury. As onerous as a repayment requirement may be, it is not usurious if it does not constitute a loan or forbearance. The Agreement was for the purchase of future receivables in return for an upfront payment. The repayment was based upon a percentage of daily receipts, and the period over which such payment would take place was indeterminate. Plaintiff took the risk that there could be no daily receipts, and defendants took the risk that, if receipts were substantially greater than anticipated, repayment of the obligation could occur over an abbreviated period, with the sum over and above the amount advanced being more than 25%. The request for the Court to convert the Agreement to a loan, with interest in excess of 25%, would require unwarranted speculation, and would contradict the explicit terms of the sale of future receivables in accordance with the Merchant Agreement.
The detailed explanation reaffirms the obvious distinctions that such a purchase has from a loan, even when such receivables purchased are future receivables. To the extent that defendants argued that a potential outcome of such an agreement could hypothetically be converted to a usurious interest rate, that is a risk that the defendants took, the Court said, and converting this sale agreement to a loan would require “unwarranted speculation.”
Christopher Murray of Giuliano McDonnell & Perrone, LLP is the attorney representing plaintiff Platinum Rapid Funding Group in this action. The case number is 604163/2015 in the New York Supreme Court.
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.
