Legal Briefs
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)
Regulator Disregards Choice of Law Provision in Usury Enforcement Action
September 1, 2015
Last Thursday, the Attorney General of North Carolina was granted an injunction against Western Sky Financial and CashCall prohibiting them from offering any loans to North Carolina consumers or collecting on any outstanding accounts in that state. The Attorney General argued that the payday loans offered by the defendants violated North Carolina’s usury laws.
The defendants countered that the loan agreements at issue included choice of law provisions that made the law of the Cheyenne River Sioux Tribe the governing law. The defendants argued that the rates charged were permissible under tribal law.
The Superior Court rejected the defendants’ arguments and granted the Attorney General’s request for the injunction. The court reasoned that the Attorney General “was not a party to the Loan Agreements, but instead [wa]s acting as an enforcement arm of the State of North Carolina.” Because the Attorney General was not a party to the agreements, the court found that the Attorney General was not bound by the agreements’ choice of law. Therefore it could enforce North Carolina’s usury laws against the defendants.
In support of its ruling, the court cited BankWest, Inc. v. Oxendine. In that case, the Georgia Court of Appeals held that “[t]he parties to a private contract who admittedly make loans to Georgia residents cannot, by virtue of a choice of law provision, exempt themselves from investigation for potential violations of Georgia’s usury laws.” 462 Mass. 164, 172 (2012).
These cases are concerning for lenders that engage in interstate lending activities because they undermine the use of choice of law provisions as a method of usury law compliance. Choice of law provisions serve dual purposes. By selecting the governing law beforehand, a lender can be more confident that the terms of its loan agreement will be enforceable against a debtor. Additionally, a choice of law provision narrows the number of states that could potentially have an interest in the transaction. This limits the number of laws the lender must comply with.
These decisions, however, cast doubt on a lender’s ability to rely on a choice of law clause when faced with a regulatory enforcement action. This could result in the paradoxical situation where a court permits a lender to enforce a choice of law clause to collect interest on a contract but at the same time allows a state regulator to bring a usury action against the lender based on the exact same contract.
What Does the Federal Reserve Think About When It Thinks About Alternative Small Business Financing?
August 27, 2015
The Federal Reserve Bank of Cleveland recently published results of a focus group it conducted on alternative small business financing. As part of the paper, the Fed included a brief discussion of some of the questions raised by the study. The considerations discussed offered an interesting glimpse of some the legal issues the Fed is thinking about in relation to alternative small business finance.
First, the Fed considered the increasing trend of bank referral partnerships and wondered if such referral arrangements raise disparate impact concerns under the Equal Credit Opportunity Act. It asked:
Do issues of disparate treatment arise if banks refer certain customers to their alternative lending partners, but offer traditional loan products to others?
The Fed’s question seems to suggest that a bank’s referral of some customers to alternative lenders over others could potentially be used against the bank in a disparate impact claim. The Fed’s comment is especially noteworthy given the recent Supreme Court decision in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. That decision approved the use of the disparate impact theory under the Fair Housing Act. Many observers had hoped the Court would find that such claims could not be brought under the FHA and thereby limit their use under other federal statutes, such as ECOA.
The Fed was also interested in the effect the use of automated underwriting systems is having on small business lending. It asked:
Does the use of automated underwriting raise or address fair lending concerns?
Unfortunately, the Fed did not specify in what ways it believes fair lending laws may be implicated by the use of automated systems. These concerns could include larger societal issues, such as the effect automated systems are having on credit availability. Or they may involve practical considerations, such as how lenders are meeting their disclosure requirements under ECOA given the increasing number of applications reviewed by automated processes.
While these questions are quite preliminary, they offer interesting insight about how regulators are thinking about the industry and the issues they’re focusing on.
