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  • Payday Lenders Argue Case for Operation Choke Point Injunction, Claim Regulator Activities Violate Their Rights to Due Process

    Courts

    On May 19, a group of payday lenders filed a brief with the Court of Appeals for the District of Columbia claiming a U.S. district court judge was wrong to deny their request for a preliminary injunction against regulator activities they claim violate their rights to due process. (See Advance America v. FDIC, et al, 2017 WL 2212168 (C.A.D.C.).)  As previously discussed in InfoBytes, the lenders claim the DOJ’s “Operation Choke Point” initiative—designed to target fraud by investigating U.S. banks and the business they do with companies believed to be a higher risk for fraud and money laundering—is a threat to their survival. The lenders’ brief alleges that federal agencies, including the DOJ and the FDIC, began as early as June 2008 to expand the interpretation of “reputation risk.” According to the lenders, reputation risk originally referred to risk to a bank’s reputation that arose from its own actions; however, the regulators expanded that to apply to risks that could arise from activities of a bank’s customers, which meant “bank servicing businesses identified as ‘high risk’ would be required to incur significant additional regulatory compliance costs and  face the risk of increased regulatory scrutiny.” This, the lenders assert, became a justification to pressure banks to sever their banking relationships with payday lenders.

    Notably, the U.S. district court judge refused to issue a preliminary injunction and was not persuaded that the lenders would be able to prove that these regulatory actions caused banks to deny services the lenders needed to operate.

    However, the lenders claim in their brief that they can show a violation of their procedural due process rights under three theories: “stigma-plus,” “reputation-plus,” and “broad preclusion.”

    • The lenders describe the “stigma-plus” theory as requiring them to show they were stigmatized in connection with an “alteration of their background legal rights” without any due process protections. They believe they can prove this occurred because they were labeled as high-risk customers and denied access to the banking system with no legal protections.
    • The “reputation-plus” theory would require a deprivation of banking services in connection with defamatory statements that harmed their reputation, the lenders claim. The lenders contend this can be proved because the “’stigmatizing charges certainly occurred in the course of the termination of the accounts, which is all that is required for a reputation-plus claim to succeed.” Each lender claims to have lost a relationship with at least one bank due to false regulator claims that the relationships could threaten the bank’s stability.
    • The “broad preclusion” theory also applies, the lenders assert, because the regulators’ statements to banks have prevented them “pursuing their chosen line of business.”

    Furthermore, the lenders take issue with the U.S. district court judge’s position that they are required to show they lost all access to banking services in order to show a due process violation. They also argue that a loss of their constitutional right to due process is a sufficient irreparable injury to justify a preliminary injunction.

    Courts Payday Lending Consumer Finance Prudential Regulators CFPB DOJ Operation Choke Point

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  • Nevada Company Executives Agree to Pay Tribe $2.5 Million for Participating in Embezzlement and Kickback Scheme

    Courts

    On May 2, during a change of plea hearing in the U.S. District Court for the District of Montana, a Nevada-based company and three of its executives pled guilty for their roles in a scheme to help tribal officials embezzle money and provide kickbacks to its payday lender officials. Specifically, the company pled guilty to charges of conspiracy to commit wire fraud and conspiracy to commit money laundering, while one of the principals and the President and CEO both pled guilty to charges of “conspiracy to commit wire fraud and engaging in monetary transactions in property derived from specified unlawful activity.” The other principal pled guilty to charges of misprision of felony, according to the plea agreement. The plea agreements further stipulate that full restitution is due to the tribe in the amount of $2.5 million. The payment in the 2015 settlement of the civil case in this matter (see writ of execution in The Chippewa Cree Tribe of The Rocky Boy Reservation of Montana v. Encore Services No. 2:14-cv-01294-JCM-PAL (D. Nev. Feb. 2, 2015)) will offset the restitution in the criminal case. In addition, one of the principals and the President/CEO are responsible for paying an additional $700,000 each, according to the breakdown contained within two of the plea deals. Sentencing is scheduled for August 24.

    Courts Anti-Money Laundering Fraud Payday Lending

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  • Oklahoma Governor Vetoes Legislation Expanding High-Cost Payday Lending

    Consumer Finance

    On May 5, Oklahoma Governor Mary Fallin vetoed legislation that would have expanded consumer payday lending in the state. Oklahoma House Bill 1913—known as the “Oklahoma Small Loan Act”—would have allowed lenders to offer installment loans with terms no longer than 12 months and interest rates up to 17 percent per month. Fallin’s veto message to the House expressed concerns about adding another high interest loan product without eliminating or restricting existing payday loan products: “House Bill 1913 adds yet another level of high interest borrowing (over 200% APR) without terminating or restricting access to existing payday loan products.” Fallin further asserted that “some of the loans created by this bill would be more expensive than the current loan options.” Four years prior, Fallin vetoed Senate Bill 817 “due to [her] concerns with the frequency [with which] low-income families in Oklahoma were using these lending options, and the resulting high cost of repayment to those families.” In the veto message, Fallin requested that the state legislature seek advice from her office as well as consumer advocates and mainstream financial institutions if it decides to revisit these issues. Under Section 11 of Article 6 of the Oklahoma Constitution, the legislation can still be enacted if two-thirds of the members of both legislative chambers vote to override the veto. In earlier votes, the legislation fell short of the two-thirds threshold, passing the Oklahoma House 59-31 and the Senate by a 28-16 margin.

    Notably, last year, the CFPB published proposed rules in the Federal Register affecting payday, title, and certain other high-cost installment loans (see previously posted Special Alert).

    Consumer Finance State Issues Payday Lending CFPB

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  • New Mexico Enacts New Laws Affecting Payday Lenders, Check Cashing Service Providers, and the Enforcement of Service Contracts / Warranties

    State Issues

    On April 6, New Mexico enacted H.B. 347, a bill amending the New Mexico Small Loan Act of 1955 (NMSLA) and Bank Installment Loan Act of 1959 (NMILA) to effectively eliminate “payday loans” in the state by requiring that loans of $5,000 or less be made pursuant to the NMSLA or NMILA. Specifically, the new law caps the annual percentage rate of such loans at 175% and requires lenders operating in New Mexico to provide loan terms of at least 120 days, and a minimum repayment schedule of four installments of substantially equal amounts. The new law also limits the fees and charges a lender may assess in connection with loans made under the NMSLA or NMILA as well as the number of times a lender may present a check or other debit for payment. Furthermore, lenders are prohibited from extending loans under the NMSLA or NMILA if the consumer has not repaid any loans previously obtained under these acts, and all lenders must report the terms of these loans to consumer reporting agencies. Notably, these new requirements do not apply to federally insured depository institutions. Moreover, H.B. 347—which takes effect on January 1, 2018—will be enforced exclusively by the state. Counties, municipalities, and other political subdivisions of the state are preempted from any regulation of terms and conditions regarding these loans whether by ordinance, resolution, or otherwise. A violation of either the NMSLA or the NMILA will constitute an unfair or deceptive trade practice under New Mexico’s Unfair Practices Act.

    Also on April 6, Governor Susana Martinez signed into law S.B. 220, a bill that amends the Service Contract Regulation Act by adding and amending definitions; providing for surety through insurance policies; and providing specific information to be included into contracts and warranties. Specifically, the amendments—which are scheduled to take effect on June 16—allow providers to obtain a reimbursement insurance policy in lieu of maintaining a deposit with the Superintendent of Insurance.

    That same day, Governor Martinez also enacted H.B. 276, a bill that increased from $500 to $2,500 the revenue threshold within a 30-day period that triggers New Mexico’s Uniform Money Services Act licensing requirement for check cashing businesses. H.B. 276 is scheduled to take effect July 1.

    State Issues Payday Lending Check Cashing Insurance

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  • CFPB Director Withdraws Notification for Final Decision in Payday Lender Charges; Parties File Differing Opinions

    Courts

    On March 31, CFPB Director Richard Cordray issued an order directing the Bureau’s Office of Administrative Adjudication to withdraw a February 13 notification informing the parties that the administrative proceeding against an online payday lender and its CEO (Respondents) had been submitted for a final decision by the CFPB.  The order noted that while the withdrawal “delay[s] [the] resolution of this appeal,” Director Cordray believed it to be appropriate in that it “help[s] minimize unnecessary or duplicative proceedings and . . . facilitate[s] a more efficient resolution of this matter.”

    The March 31 order follows a March 9 order in which parties were directed to file statements indicating whether they objected to the withdrawal of the notification. The parties offered differing opinions in their responses. In their March 24 filing, Respondents agreed generally with the Bureau’s reasons for withdrawal but sought clarification on the timing of the “proposed re-notification in this matter” and, furthermore, stressed that that re-notification should only be made once the cases of PHH Corp v. CFPB, Lucia v. SEC, and Bandimere v. SEC have been resolved by their respective courts. A three-judge panel had previously ruled in PHH that the structure of the CFPB was unconstitutional and that the Bureau’s interpretations of the kickback prohibitions of the Real Estate Settlement Procedures Act (RESPA) and RESPA’s statute of limitations provisions were erroneous. The full court granted the CFPB’s petition in February 2017 and explicitly vacated the panel’s decision (see previously posted Special Alert). Conversely, the Enforcement Counsel’s filing “respectfully” objected to the withdrawal of the notice “because resolution of the PHH matter will not determine the resolution of this proceeding and . . . any delay would be inefficient and would exacerbate the harm to affected consumers.”

    Last September, administrative law judge, the Hon. Parlen L. McKenna, recommended civil money penalties against Respondents totaling over $13 million as well as restitution of over $38 million to be paid to affected consumers. It further affirmed the CFPB’s allegations that the Respondents deceived consumers about the cost of short-term loans, thereby violating the Truth in Lending Act, the Electronic Fund Transfer Act, and the Consumer Financial Protection Act’s prohibition against deceptive acts or practices. Following the recommended decision, the Respondents filed a notice of appeal.

    Courts CFPB Payday Lending PHH v CFPB Litigation

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  • Federal Court in North Dakota Dismisses CFPB Complaint Against Payment Processor for Insufficient Factual Allegations

    Courts

    In an Order issued on March 17, a U.S. District Court for the District of North Dakota dismissed an enforcement action filed by the CFPB against a payment processor and its two top executives.  The Bureau had filed the lawsuit last year against a Fargo-based third-party payment firm, and its co-owners, alleging that the firm had “ignored” warnings from financial institutions of possible unauthorized debits and other possibly suspicious activity, including the possibility that the firm was processing electronic funds transfers on behalf of payday lenders in states where payday loans are illegal. 

    In granting Defendants’ motion to dismiss without prejudice, the Court held, among other things, that the CFPB had failed to “plead[] facts sufficient to support the legal conclusion that consumers were injured or likely to be injured” by the actions attributed to the defendants in the complaint.  As explained by the Court, "[a]lthough the complaint need not contain detailed factual allegations, it must contain 'more than an unadorned, the-defendant-unlawfully-harmed-me accusation.”  The Court emphasized both that (i) “[f]ormulaic recitations of the elements of a claim or assertions lacking factual enhancement are not sufficient,” and (ii) that “[t]he facts alleged in the complaint must be plausible, not merely conceivable.”  Applying this standard, the Court ultimately held that the CFPB’s complaint “d[id] not contain sufficient factual allegations to back up its conclusory statements regarding Intercept’s allegedly unlawful acts or omissions.”

    Courts CFPB Payment Processors Payday Lending

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  • District Court Denies Injunction Against “Operation Choke Point” Activities

    Courts

    On February 23, a U.S. District Court for the District of Columbia issued a Memorandum Opinion denying a request for injunctive relief sought by a group of payday lenders to stop “Operation Choke Point” – a DOJ initiative targeting fraud by investigating US banks and the business they do with companies believed to be a higher risk for fraud and money laundering including, but not limited to, payday lenders. Payday lenders have called the initiative a coordinated effort by federal regulators to stop banks from doing business with them, thereby threatening their survival. See Advance America v. FDIC, [Memorandum Opinion No. 134] No. 14-CV-00953-GK (D.D.C. Feb. 23, 2017). According to the lenders, the Fed, FDIC, and OCC have adopted DOJ guidance on bank reputation risk and then used that guidance to exert “backroom regulatory pressure seeking to coerce banks to terminate longstanding, mutually beneficial relationships with all payday lenders.”  The government has rejected this characterization, asserting that banks can do business with payday lenders as long as the risks are managed properly.

    Evaluating the request under the due process “stigma-plus rule,” the Court focused on whether the payday lenders could show they were likely to succeed on the merits of their case and whether or not they were likely to suffer irreparable harm without the injunction.

    Ultimately, the payday lenders were unable to convince the Court that they were likely to suffer the harm central to a “stigma-plus” claim. The Court reasoned that (i) the closure of some bank accounts would not be enough to constitute the loss of banking services, and that the lenders needed (and failed) to show that the loss of banking services had effectively prevented them from offering payday loans; and (ii) nearly all of the lenders were still in operation; and (iii) because the lenders were still able to find banks to work with, evidence of the possibility of future loss of banking services was too speculative to support an injunction.

    The Court was also not persuaded that the lenders would be able to prove that regulatory actions caused banks to deny services to petitioners. Specifically, the Court determined that the lenders were “unlikely” to be able to set forth evidence of the “campaign of backroom strong-arming” underlying petitioners’ request for injunctive relief. Specifically, the Court noted that the lenders relied on “scattered statements,” some of which the Court characterized as “anonymous double hearsay,” to support their claims. The only direct evidence, according to the Court, was actually just “evidence of a targeted enforcement action against a single scofflaw.”

    Though the Court explained that the two other factors—the balance of equities and the public interest—were of less significance in this situation, it noted in closing that “enjoining an agency’s statutorily delegated enforcement authority is likely to harm the public interest, particularly where plaintiffs are unable to demonstrate a likelihood of success on the merits.”

    Courts Consumer Finance CFPB DOJ Operation Choke Point Payday Lending Prudential Regulators Federal Reserve FDIC OCC

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  • Georgia Attorney General Orders Payday Lenders to Pay $40 Million in Civil Monetary Penalty and Restitution to Consumers

    State Issues

    On February 8, the Office of the Georgia Attorney General announced that it had entered into a settlement agreement with two payday lenders over claims that the companies violated the state’s Payday Lending Act, which prohibits unlicensed loans of $3,000 or less. While the interest rate for loans made under the Payday Lending Act is capped at 10 percent, the unlicensed lenders in this case allegedly issued over 18,000 loans with interest rates ranging from 140 percent to 340 percent and collected over $32 million in associated interest and fees since 2010. According to the terms of the settlement, the companies are required to (i) pay $23.5 million in consumer restitution; (ii) cease all collections and forgive all outstanding loans; (iii) pay a $1 million civil penalty to the state; and (iv) pay $500,000 as reimbursement for the state’s attorneys’ fees and costs.

    State Issues Consumer Finance Payday Lending State AG

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  • CFPB Orders Payday Lender to Pay Over $500k in Civil Monetary Penalty and Restitution to Customers

    Federal Issues

    On December 16, the CFPB announced that it had entered a stipulation and consent order assessing a $250,000 civil monetary penalty and other remediation against a financial-services company that offers payday loans and check-cashing services based on allegations that it misled consumers through deceptive online advertisements and collections letters and made unauthorized electronic transfers from consumers’ bank accounts. Among other things, the Bureau took particular issue with the fact that Bureau examiners had previously identified “significant compliance-management-system weaknesses that heightened the risk that violations w[ould] occur,” and that “[a]t the times the violations described in this order, the company had not adequately addressed these issues.”

    According to the terms of the consent order, the company is required to: (i) end its deceptive practices and obtain authorization for any electronic-fund transfers; (ii) pay approximately $255,000 to redress harm caused to affected consumers; and (iii) pay a civil monetary penalty of $250,000. As explained by CFPB Director Richard Cordray, “consumers were making decisions based on false and deceptive information, and today’s action will give the company’s customers the redress they are owed.”

    Federal Issues Consumer Finance CFPB Payday Lending Electronic Fund Transfer Check Cashing

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  • FTC Announces $1.3 Billion Judgment Against Payday Lenders

    Federal Issues

    On October 4, the FTC announced a $1.3 billion judgment against defendants responsible for operating an allegedly deceptive payday lending scheme. The judgment is the result of 2012 complaint in which the FTC alleged that the defendants engaged in deceptive acts or practices in violation of Section 5(a) of the FTC Act by making false and misleading representations about costs and payment of the loans. According to the FTC, the defendants claimed that they would charge consumers the loan amount and a one-time finance fee.  However, the court found that the defendants “made multiple withdrawals from consumers’ bank accounts and assessed a new finance fee each time, without disclosing the true costs of the loan.” The $1.3 billion order is the largest litigated judgment the FTC has obtained to date.

    Federal Issues Consumer Finance FTC Payday Lending UDAAP

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