Legal Briefs
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An archived version of American Capital Holding’s website said the following on the home page: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.
Court Finds Usurious Late Fees Unenforceable
September 19, 2015
Though usury caps are only applicable to loan transactions, courts often reference usury rates when determining the reasonableness of fees charged on amounts due. A fee that significantly exceeds the applicable usury rate may be found to be an unenforceable penalty and uncollectible. Companies that impose late fees or other types of charges on their customers must be careful to ensure their fees will be found enforceable by a court.
For example, a NY court recently found a late fee charged by a condominium association unreasonably excessive and refused to enforce it. The charge at issue was related to unpaid common charges. The defendant’s charges were $1,175.85 per month. The defendant failed to pay her monthly charges so the association assessed late fees ranging from $200 to $800 per month. When the association later filed a foreclosure action for multiple unpaid common charges, the defendant argued that the late fees were excessive and confiscatory and should not be allowed.
The court noted that while a usury defense was inapplicable, the 25% rate set by NY’s criminal usury statute provided a guide to what constituted excessive fees. The court found that because the fees significantly exceeded the usury rate they were unreasonable penalties and could not be enforced. As a result, the court reduced the late fees to $0.04 per dollar owed.
As this case shows, courts will often look to applicable usury rates when determining the reasonableness of contractual fees and other types of charges. Fees that significantly exceed these rates are likely void and uncollectible. For this reason, a company that wishes to charge contractual fees would be wise to stay below the statutory usury rate. While the rate may result in a lower fee, the amount charged is more likely to be enforced by a reviewing court.
Board of Mgrs. of the Park Ave. v Sandler, 2015 N.Y. Misc. LEXIS 3284 (N.Y. Sup. Ct. Sept. 11, 2015)
Multiple State Regulators Challenging Lender’s Use of Choice of Law Clause in Usury Enforcement Actions
September 11, 2015
A growing number of state regulators are challenging the use of choice of law provisions as a method of usury law compliance. On August 27, 2015, the Attorney General of North Carolina was granted an injunction against Western Sky Financial and CashCall¹. The injunction prohibits them from offering any loans to North Carolina consumers or collecting on any outstanding accounts in that state.
Prior to the issuance of the North Carolina injunction, the Massachusetts Division of Banks sent a cease and desist letter to Western and CashCall stating that each had violated Massachusetts’ law by engaging in the small loan business without a license and that each had violated the state’s criminal usury statute (the letters were initially sent in 2013 but the Division’s findings were recently challenged by Western and CashCall in Massachusetts Superior Court. The court issued its ruling on the challenge on August 31, 2015²). The cease and desist orders specifically directed Western and CashCall to cease collecting on loans made to Massachusetts borrowers, refrain from transferring the loans, refund all interest charges and fees received from borrowers during the last four years, and submit a list of borrowers to whom reimbursement is owed.
And just yesterday the Attorney General of the District of Columbia filed a lawsuit against Western, CashCall and their owner, J. Paul Reddam. The complaint alleges that the defendants charged their customers interest rates in excess of the District’s usury cap. The District is seeking a permanent injunction, restitution, statutory penalties and attorney fees.
In response to both the North Carolina and Massachusetts actions, Western and CashCall asserted that they were not subject to the regulators’ jurisdiction because the choice of law clause in their loan contracts provided the laws of the Cheyenne River Sioux Tribe governed the transactions. The defendants argued that the rates charged were permissible under tribal law (a similar argument is expected to be made by the defendants in response to the DC complaint).
Their argument was rejected in both cases. The reviewing courts found that a contractual choice of law provision did not govern a state regulator and that North Carolina and Massachusetts could pursue the defendants for their alleged violations of local usury laws. These decisions, along with the complaint filed by DC’s Attorney General, cast further doubt on a lender’s ability to rely on a choice of law clause when faced with regulatory enforcement actions.
¹State ex rel. Cooper v. Western Sky Fin., LLC, 2015 NCBC 84 (N.C. Super. Ct. 2015)
²Cashcall, Inc. v. Mass. Div. of Banks, 2015 Mass. Super. LEXIS 87 (Mass. Super. Ct. Aug. 31, 2015)
3rd Circuit Affirms FTC’s Role as Cybersecurity Cop
September 10, 2015
Under the Federal Trade Commission Act, the FTC has broad powers to regulate unfair and deceptive business practices. The FTC has interpreted these powers to include the regulation of cybersecurity measures used by businesses to protect customer data. If the FTC believes that a company’s cybersecurity measures are unreasonably inadequate, it may bring a suit against the company for what it deems an ‘unfair’ act.
This is exactly what the Commission decided to do in its recent suit against Wyndham Worldwide Corporation. On three different occasions, Wyndham’s computer systems were hacked and consumers’ personal data was accessed and stolen. In its complaint, the FTC alleged that the security breaches were a result of Wyndham’s failure to use adequate measures to safeguard its customers’ data. The FTC argued that Wyndham’s security measures were so lax that it constituted an ‘unfair’ act under federal law. Wyndham moved to dismiss the complaint and argued that the FTC lacked the authority to regulate cybersecurity under the unfairness prong of the FTC Act.
The trial court denied Wyndham’s motion and the Third Circuit upheld the decision. In its opinion, the Third Circuit noted that the FTC Act purposely does not list specific unfair acts. Rather, the Act was intended to be flexible and capable of evolving along with changing business practices. Therefore, the Circuit Court held that the FTC had authority to regulate cybersecurity.
The decision is noteworthy for alternative small business funders and brokers that electronically receive and store volumes of personal customer data. Companies must be aware that the FTC expects them to maintain a certain standard of cybersecurity and those that fail to meet that standard may be subject to enforcement actions. It is also clear that the FTC is making cybersecurity a top priority as just yesterday it held the first of a series of conferences on data security strategies.
Companies in the small business finance space would be wise to compare the FTC’s recommendations with their current cybersecurity procedures.
FTC v. Wyndham Worldwide Corp., 2015 U.S. App. LEXIS 14839 (3d Cir. N.J. Aug. 24, 2015)
