Legal Briefs
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)
Fake Business Loan Application Fees Leads to Two Convictions
October 5, 2015
Two men were convicted last week of perpetrating an advance fee fraud scheme. David C. Jackson and Alexander D. Hurt defrauded more than 40 individuals out of $4.5 million, mainly by directing small businesses hoping to get a loan to pay phony application fees, collateral fees, or commitment fees. “These defendants and their co-conspirators took advantage of individuals and business owners who had limited options in acquiring business loans in the difficult financial environment that existed after the recession of 2008,” states a report issued by the Department of Justice.
Deirdre M. Daly, United States Attorney for the District of Connecticut, said that people need to be careful about loan offers online. “Those seeking business loans need to be wary of any provider of funding that requires significant fees in advance—especially those who use the Internet to prey upon trusting people who are unable to verify the representations made,” Daly said.
“Jackson was previously convicted of federal bank fraud and money laundering offenses in October 2006 and was sentenced to 41 months in prison, followed by five years of supervised release,” the DOJ report says. “He was released from federal prison in September 2009 and operated this advance fee fraud scheme while on supervised release.”
The two used a slew of personal aliases and business names to cover their trail. The business names included:
- Jalin Realty Capital Advisors, LLC
- American Capital Holdings, LLC
- Brightway Financial Group, LLC
An archived version of American Capital Holding’s website said the following on the home page:
“In today’s economic climate, finding reliable funding sources can be frustrating. Fortunately, we are partnered with an investment fund that provides commercial real estate development and acquisition projects. Due to our professionalism & honesty we have achieved massive trust worldwide.”
One lesson here would be to cautious of anyone who says they have “achieved massive trust” but another is to conduct background checks on the online lender you’re considering.
And of course never pay a fee upfront for the promise of a loan in return.
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)
FCC Issues Citations for Insufficient TCPA Disclosures
September 22, 2015
The FCC recently issued telemarketing citations against First National Bank and Lyft, Inc., a ride-sharing service. The Commission cited the companies for requiring their customers to consent to receiving auto-dialed calls and texts as a condition of using the companies’ services. The FCC alleged that the companies’ requirements violated regulations issued pursuant to the Telephone Consumer Protection Act that forbid companies from requiring their customers to agree to receive marketing robocalls and auto-dialed calls/texts as a condition of purchasing any goods, services, or property. The citations demonstrate the Commissions’ intent to actively enforcing the TCPA and its regulations.
In light of the FCC citations, small business lenders that engage in telemarketing sales –especially to cellphones – should review their TCPA disclosures. In particular, companies need to ensure they obtain “prior express written consent” before engaging in auto-dialed calls/texts to mobile numbers. And as the FCC noted, the requirements are exacting:
The agreement must be in writing;
The agreement must bear the signature of the person who will receive the advertisement/telemarketing calls or texts;
The language of the agreement must clearly authorize the caller to deliver or cause to be delivered advertisements or telemarketing messages via auto-dialed calls, texts, or robocalls;
The written agreement must include the telephone number to which the person signing authorizes advertisements or telemarketing messages to be delivered; and
The written agreement must include a clear and conspicuous disclosure informing the person signing that:
- By executing the agreement, the person signing authorizes the caller to deliver or cause to be delivered ads or telemarketing messages via auto-dialed calls, texts, or robocalls; and
- The person signing the agreement is not required to sign the agreement (directly or indirectly), or agree to enter into such an agreement as a condition of purchasing any property, goods, or services.
In the event that consent is disputed, it is the caller that bears the burden of “demonstrating that a clear and conspicuous disclosure was provided and that unambiguous consent was obtained.”
While the citations do not carry monetary penalties, the FCC may impose sanctions against First National and Lyft if the violations continue. The citations also invite the filing of private TCPA actions against the companies. All the more reason for small business lenders to conduct a proactive review of their TCPA compliance procedures.
