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  • NYDFS recommends online lenders be subject to state licensure and usury limits in new report

    Lending

    On July 11, the New York Department of Financial Services (NYDFS or the Department) released a study of online lending in New York, as required by AB 8938. (Previously covered by InfoBytes here.)  In addition to reporting the results of its survey of institutions believed to be engaging in online lending activities in New York, NYDFS makes a series of recommendations that would expand the application of New York usury and other statutes and regulations to online loans made to New York residents, including loans made through partnerships between online lender and banks where, in the Department’s view, the online lender is the “true lender.”

    In particular, NYDFS recommends, “[a]ll New York lenders should operate under the same set of rules and be subject to consistent enforcement of those rules to achieve a level playing field for all market participants….”  Elsewhere in the report, the Department states that it “disagrees with [the] position” that online lenders are exempt from New York law if they partner with a federally-chartered or FDIC-insured bank that extends credit to New York residents.  NYDFS criticizes these arrangements, stating its view that “the online lender is, in many cases, the true lender” because the online lender is “typically … the entity that is engaged in marketing, solicitation, and processing of applications, and dealing with the applicants” and may also purchase, resell, and/or service the loan.  

    NYDFS also noted that it opposed pending federal legislation that would reverse the Second Circuit’s decision in Madden v. Midland Funding, LLC, which held that federal preemption of New York’s usury laws ceased to apply when a loan was transferred from a national bank to a non-bank.  The Department expressed concern that, if passed, the bill “could result in ‘rent-a-bank charter’ arrangements between banks and online lender that are designed to circumvent state licensing and usury laws.”

    Noting that many online lenders remain unlicensed in New York, the Department states that “[d]irect supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery….”  To this end, NYDFS recommended lowering the interest rate threshold for licensure from 16 percent to 7 percent.

    Although NYDFS stressed that its survey results may be unreliable due to uneven response rates, it reported that, for respondents, the average median APR for online loans to businesses was 25.9%, the average median APR for online loans to individuals for personal use was 14.8%, and the average median APR for the underbanked customers was 19.6% (New York currently caps interest for civil liability at 16% and at 25% for criminal liability).

    Overall, the report appears to forecast a more difficult regulatory and enforcement environment in New York for online lenders, as has been the case in West Virginia and Colorado.

     

    Lending State Issues NYDFS Online Lending Usury Consumer Finance Madden

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  • 21 Attorneys General oppose “Madden fix” legislation

    State Issues

    On June 27, the Colorado and New York Attorneys General led a coalition of 21 state Attorneys General in a letter to congressional leaders opposing HR 3299 (“Protecting Consumers’ Access to Credit Act of 2017”) and HR 4439 (“Modernizing Credit Opportunities Act”), which would effectively overturn the 2015 decision in Madden v. Midland Funding, LLC.  Specifically, H.R. 3299 and H.R. 4439 would codify the “valid-when-made” doctrine and ensure that a bank loan that was valid as to its maximum rate of interest in accordance with federal law at the time the loan was made shall remain valid with respect to that rate, regardless of whether the bank subsequently sells or assigns the loan to a third party.

    The letter argues that the legislation “would legitimize the efforts of some non-bank lenders to circumvent state usury law” and it was not Congress’ intention to authorize these arrangements with the creation of the National Bank Act. In support of their position, the Attorneys General cite to a 2002 press release by the OCC and the more recent OCC Bulletin 2018-14 on small dollar lending, which stated the agency “views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).” (Previously covered by InfoBytes here.) The letter also refers to an 1833 Supreme Court case, Nichols v. Fearson, which held that a “valid loan is not invalidated by a later usurious transaction involving that loan” but was not relevant to the decision in Madden  because the borrower’s argument related to preemption. Ultimately, the Attorneys General conclude the legislation would erode an “important sphere of state regulation” as state usury laws have “long served an important consumer protection function in America.”

    State Issues Madden Usury State Attorney General National Bank Act OCC

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  • Maryland governor signs provisions amending Maryland Consumer Loan Law’s small lending requirements

    State Issues

    On May 15, the Maryland governor signed legislation to establish requirements for lenders making covered loans in the state. Among other things, HB1297 increases the threshold for which a loan is subject to small lending requirements within the Maryland Consumer Loan Law (MCLL) from $6,000 to $25,000. The law also prohibits (i) lenders who are not licensed in the state from making loans of $25,000 or less, unless the person is exempt from requirements under MCLL; (ii) a person contracting “for a covered loan that has a rate of interest, charge, discount, or other consideration greater than the amount authorized under state law”; and (iii) covered loans that would be a violation of the Military Lending Act. Loans that violate these provisions are deemed void and unenforceable except in limited circumstances. The law takes effect January 1, 2019.

    State Issues State Legislation Licensing Lending Military Lending Act Usury Consumer Finance

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  • Florida District Court of Appeal holds contract for used car not covered by state usury law

    Courts

    On April 25, a Florida District Court of Appeal held that a Florida usury law did not apply to the purchase of a used car because the contract for purchase was a retail installment sales contract covered under the Florida Motor Vehicle Retail Sales Finance Act (the Finance Act). According to the opinion, a consumer filed a lawsuit against a used car seller and a lender claiming violations of Florida’s general usury law, which prohibits interest of more than 18 percent per year, because the contract for purchase of a used car had a 27.81 percent interest rate. In affirming the trial court’s decision to grant summary judgment for the car seller and lender, the appeals court found that the contract for purchase met the state’s definition of a retail installment sales contract and,  therefore, was governed by the Finance Act (which both the seller and lender were licensed under) rather than the general usury statute. Additionally, because the car was financed over a four-year period, the appeals court found that the finance charge per year was permissible under the Finance Act at $16.48 for every $100. The court also held that the general usury law did not apply to a contract to secure the price of personal property sold, as opposed to a contract for the “loan of money.”

    Courts State Issues Auto Finance Interest Rate Usury Consumer Finance

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  • Court grants summary judgment to credit reporting agency over FCRA dispute

    Courts

    On April 4, the U.S. District Court for the Northern District of California granted a consumer reporting agency’s motion for summary judgment, holding that a “firm offer of credit” under the FCRA does not require that an offer based on furnished information result in an enforceable contract. According to the opinion, a consumer filed a putative class action suit alleging that the consumer reporting agency violated the FCRA by providing California residents’ credit report information to two businesses that were not licensed to make consumer loans in California and that offered interest rates which exceed allowable limits under California law. The court disagreed, holding that the FCRA only requires that a prescreened offer not be retracted if the consumer meets the creditor’s pre-selection criteria. Additionally, the court rejected the consumer’s argument that the FCRA also imposes a duty on consumer reporting agencies to separately credential service providers who are given access to the furnished information from their credentialed principals. The court emphasized that “neither the FCRA, nor any case authority addressing the FCRA” imposes this duty.

    Courts FCRA Usury Prescreened Offers

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  • Tennessee amends interest rate legislation

    Lending

    On March 23, the Governor of Tennessee signed HB 1944, which amends lending provisions of the Tennessee Code Annotated to change the application of interest rates to the amount financed instead of the total amount of the loan with regard to certain loans made by Tennessee industrial loan and thrift companies. The following interest rate requirements under present Tennessee law now apply to the amount financed: (i) under $100, no interest shall be charged on the principal or on the unpaid balance due after maturity in excess of a maximum effective rate of 18 percent per annum; (ii) between $100 and $5,000, no interest shall be charged on the principal or on the unpaid balance due after maturity in excess of a maximum effective rate of 30 percent per annum; (iii) greater than $5,000, no interest shall be charged on the principal or on the unpaid balance due after maturity in excess of a maximum effective rate of 24 percent per annum; and (iv) for open-end credit plans, a maximum effective rate of 24 percent per annum applies to the principal or on the unpaid balance due after maturity. HB 1944 is effective immediately and applies to loans made on or after March 23.

    Lending State Issues Interest Rate Consumer Finance Usury State Legislation

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  • Colorado judge rules FDIA does not completely preempt state usury claims against a non-bank

    Courts

    On March 21, the U.S. District Court for the District of Colorado held that the Federal Deposit Insurance Act (FDIA) does not completely preempt a Colorado state regulator’s claims that a non-bank lender violated state law and remanded the case back to state court. The underlying action results from charges brought by the administrator of Colorado’s Uniform Consumer Credit Code against a non-bank lender – which the administrator argues is the “true lender” of loans issued by a New Jersey-chartered bank – for allegedly overcharging interest and other fees in violation of state law. In granting the motion to remand, the court noted that the administrator sufficiently alleged the non-bank was the “true lender” of the loans in question as the non-bank provided the website through which customers apply for the loans, determined the criteria for marketing the loans, decided which applications receive loans, and purchased the loans within two days after they were made by the New Jersey bank. The district court concluded that while courts are split as to banks, because the true lender of the loans was a non-bank, complete preemption by FDIA does not apply even though the non-bank lender has a “close relationship” with a state or national bank. The district court also stated that whether the non-bank is a “true lender” is “not relevant to the issues of complete preemption, which determine whether remand is warranted.”

    Courts Preemption State Issues Usury Interest Rate Nonbank True Lender FDIA

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  • Judge says overdraft fees are not usurious, removes claim from lawsuit

    Courts

    On February 28, the U.S. District Court for the District of South Carolina dismissed a complaint from a consolidated class action against a national bank, which alleged that the bank’s $20 overdraft fee is an interest charge on credit and therefore exceeds usury limits under the National Bank Act (NBA). The plaintiffs in the consolidated class action challenged the bank’s methods for assessing overdraft fees, posting debit transactions, and assessing “sustained” overdraft fees, claiming they violated federal law. In granting the dismissal, the court noted that it had previously rejected a materially identical usury claim in December 2015 and that no new evidence or authority had been brought to light that would change its decision. In addition, the court concluded that “the law is still clear that sustained overdraft fees are not interest, and that assessing such fees cannot violate the usury provision of the NBA.” 

    Courts Usury Overdraft National Bank Act Class Action

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  • House passes bill that would effectively overturn Madden; others amend RESPA disclosure requirements and adjust points and fees definitions under TILA

    Federal Issues

    On February 14, in a bipartisan vote of 245-171, the House passed H.R. 3299, the “Protecting Consumers Access to Credit Act of 2017,” to codify the “valid-when-made” doctrine and ensure that a bank loan that was valid as to its maximum rate of interest in accordance with federal law at the time the loan was made shall remain valid with respect to that rate, regardless of whether the bank subsequently sells or assigns the loan to a third party. As previously covered in InfoBytes, this regulatory reform bill would effectively overturn the 2015 decision in Madden v. Midland Funding, LLC, which ruled that debt buyers cannot use their relationship with a national bank to preempt state usury limits. Relatedly, the Senate Banking Committee is considering a separate measure, S. 1642.

    The same day, in a separate bipartisan vote of 271-145, the House approved H.R. 3978, the “TRID Improvement Act of 2017,” which would amend the Real Estate Settlement Procedures Act of 1974 (RESPA) to modify disclosure requirements applicable to mortgage loan transactions. Specifically, the bill states that “disclosed charges for any title insurance premium shall be equal to the amount charged for each individual title insurance policy, subject to any discounts as required by either state regulation or the title company rate filings.”

    Finally, last week on February 8, the House voted 280-131 to pass H.R. 1153, the “Mortgage Choice Act of 2017,” to adjust definitions of points and fees in connection with mortgage transactions under the Truth in Lending Act (TILA). Specifically, the bill states that “neither escrow charges for insurance nor affiliated title charges shall be considered ‘points and fees’ for purposes of determining whether a mortgage is a ‘high-cost mortgage.’” On February 12, the bill was received in the Senate and referred to the Committee on Banking, Housing, and Urban Affairs.

    Federal Issues Federal Legislation U.S. House Usury Lending RESPA TILA Mortgages Disclosures Madden

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  • House Financial Services Subcommittee conducts hearing on fintech opportunities and challenges

    Fintech

    On January 30, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Examining Opportunities and Challenges in the Financial Technology (“Fintech”) Marketplace.” The Subcommittee issued a press release following the hearing and presented the following key takeaways:

    • “Modern developments in digital technology are changing the way in which many financial services are offered and delivered”; and
    • “Congress and the federal prudential regulators must continue to examine this innovative marketplace to understand the opportunities and challenges it presents, and to ensure that financial services entities are allowed to use fintech to deliver new products and services while also protecting consumers.”

    Opening statements were presented by several members of the Subcommittee, including Subcommittee Vice Chair Keith Rothfus, R-PA, who noted that online lending, mobile banking, and other products could bring capital back to areas deserted by traditional banks. Subcommittee Chairman Blaine Luetkemeyer, R-MO, highlighted that loan originations passed through marketplace lenders accounted for nearly $40 billion over the past ten years, with online lenders often able to offer better lending terms. Luetkemeyer also discussed the rise of mobile banking and lending and raised the question presented by some states of whether fintech companies should be required to comply with current laws that apply to similar products. He stressed that understanding fintech’s capabilities “can better create an environment that fosters certainty and responsible innovation while maintaining consumer protections.” A broad range of topics were discussed at the hearing, including the following highlights:

    • Madden v. Midland / True Lender. Companies that have chosen to partner with banks have also run into regulatory and legal roadblocks, including the recent decision in Madden v. Midland Funding, which determined that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act from state-law usury claims. (See Buckley Sandler Special Alert here.) In prepared remarks, Andrew Smith, Partner at Covington and Burling, LLP, stated that because of varying outcomes in true lender court challenges, the lack of certainty means that “market participants will no longer be willing to enter into these types of transactions, thereby depriving consumers, banks, and the economy of the many benefits of bank partnerships with fintech providers while also hampering the liquidity necessary to support a robust lending market.” Smith went on to discuss H.R. 4439, the Modernizing Credit Opportunities Act, which was introduced to “reconfirm and reinforce existing federal law with respect to a bank’s identity as the true lender of a loan with the assistance of a third-party service provider.” Smith emphasized that the legislation would “resolve any uncertainty about a bank’s ability to use third-party service providers by confirming the principle that when a bank enters into a loan agreement, it is the bank that has made the loan.”
    • Marketplace Lending. During his testimony, witness Nathaniel Hoopes, Executive Director at the Marketplace Lending Association, highlighted the role marketplace lending platforms (MPPs) have had in delivering products to underserved consumers, but emphasized that a lot of work still needs to happen for more of the “broad American ‘middle class’ to fully realize and benefit from the potential of MPPs specifically and fintech more broadly.” He also expressed support for the Special Purpose National Bank charter currently under consideration by the OCC.
    • Regulatory Sandboxes. Witness Brian Knight, Director of the Program on Financial Regulation and Senior Research Fellow at the Mercatus Center at George Mason University, suggested in his prepared remarks various methods to improve the current regulatory environment, and opined that lawmakers could allow firms that participate in a regulatory sandbox program and comply with its requirements to avoid liability as long as the firm makes “customers whole if the firm causes harm owing to a violation of the law.” Knight added that states could be allowed to grant special non-depository charters similar to those offered by the OCC. And while witness Professor Adam J. Levitin of the Georgetown University Law Center agreed that sandboxes would allow companies to explore new ideas with the understanding that customers must be protected, he cautioned that the fragmentation of the regulatory system around fintech makes it hard for experimentation, and that risk would need to be regulated.
    • Virtual Currencies. Knight discussed his concerns with initial coin offerings (ICOs) and commented that while ICOs “may enable firms to access capital more effectively than traditional methods, there are significant concerns that they are being used by both outright frauds and well-meaning but ignorant firms to obtain capital in contravention of existing laws governing the sales of securities, commodities futures contracts, and products and services.” However, Knight testified that despite the potential for risk, peer-to-peer payments, cryptocurrencies, and other innovations demonstrate potential, and that innovative lenders are replacing banks in communities where it is no longer profitable for those banks to serve.
    • Inconsistent Regulations. During his testimony, witness Brian Peters, Executive Director at Financial Innovation Now, advocated for improved coordination among regulators and stressed that the “current structure is needlessly fragmented and inconsistent among federal regulators, and varies widely across state jurisdictions.” Peters also commented on the need to modernize the regulatory structure to keep pace with innovation and meet consumers’ needs.

    Fintech House Financial Services Committee Marketplace Lending True Lender Virtual Currency Bank Regulatory Usury Third-Party Madden

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