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  • New York Attorney General sues over 25 lenders for predatory lending operation

    State Issues

    On March 5, New York Attorney General Letitia James released a verified petition against 27 lenders accusing them of a “large-scale, predatory lending” operation in which they allegedly misrepresented themselves in order to issue small businesses short-term loans at “sky-high interest rates” in violation of New York Executive Law §63(12). According to the petition, the 27 lenders (Respondents) have issued “illegal, usurious” and fraudulent loans in the form of Merchant Cash Advances (MCAs), which imposed triple-digit interest rates as high as 820 percent. The NYAG noted such rates are beyond both the maximum civil usury interest rate (16 percent) and the maximum criminal usury interest rate (25 percent). The petition also alleged the Respondents misrepresented their transactions in court, making the court an “unwitting part of their illegal scheme.”

    The petition asked the court to permanently enjoin Respondents from committing any further fraudulent or illegal practices, cease all MCA collection payments, and void and rescind all MCAs. The NYAG also will seek and order that the Respondents disgorge all profits and award civil penalties of $5,000 for each fraudulent MCA transaction and $2,000 in costs from each Respondent. 

    State Issues State Attorney General New York Fraud Lending Predatory Lending

  • State Supreme Court vacates and remands TILA dispute

    Courts

    Recently, the Maine Supreme Judicial Court vacated a judgment in favor of a bank and remanded the decision to re-examine the nature of a loan and consider all relevant evidence to determine if the loan was for commercial purposes. The plaintiffs defaulted on a loan from the defendant, a bank, by securing the loan with a hunting cabin they owned, and a lease for the land on which they had built the cabin. The defendant successfully sued for recovery of the cabin. On appeal, the plaintiffs argued the bank failed to make the requisite disclosures under TILA and thus it was in error to decide in favor of the bank. The bank conceded that it did not make the required disclosures but countered that the credit transaction was not subject to TILA because the loan was for commercial purposes, and if the loan was secured by real property, it was not expected to be used as the principal dwelling of the consumer(s).

    First, the court found that it was an error not to consider extrinsic evidence when determining the purpose of the loan because the Official Staff Interpretations of Regulation Z outline factors to be considered in such a determination, which should be given great deference. Moreover, it found that most federal courts applied a holistic approach in determining the purpose of the loan. Because the Business and Consumer Docket court in Maine did not consider any extrinsic evidence, it decided to remand. Second, the court held that the TILA exemption for “credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer . . . in which the total amount financed exceeds $50,000” was inapplicable. Although the loan was for $378,698, the loan was secured by a leasehold. According to the court, the leasehold was an interest in real property, and the language in the exemption referencing “principal dwelling” only modified “personal property” and not “real property.”

     

    Courts TILA Maine Consumer Finance Real Estate Lending

  • Texas resolves securities fraud case with decentralized finance lending platform

    State Issues

    Recently, a decentralized finance crypto lending platform and its owners (respondents) entered into a settlement agreement with a Texas regulatory agency, resolving an emergency cease-and-desist action brought in June 2023. The Texas State Securities Board alleged that respondents committed securities fraud in connection with the offers and sales of investments, falsely denied the platform’s impending bankruptcy, and “secretly” transferred customer funds to a crypto exchange, as well as offered unregistered securities. Under the terms of the settlement, respondents have agreed to, among other things, (i) inform clients of its plan for asset return within seven days of the settlement and provide a seven-day window for clients to withdraw assets through the app; (ii) continue to provide customer support to prior customers; (iii) pay an administrative fine; and (iv) cease-and-desist from selling unregistered securities in the state without admitting or denying the allegations. Texas also agreed to dismiss its emergency cease-and-desist order as part of the settlement.  

    State Issues Texas Enforcement Cryptocurrency Lending

  • Student loan servicer fined $1.8 million by Massachusetts Attorney General

    State Issues

    On January 11, the Massachusetts Attorney General (AG) announced a $1.8 million settlement with a student loan servicer, to resolve allegations that the company did not properly communicate Income-Driven Repayment (IDR) plan renewals to borrowers. According to the settlement, IDR plans are a “helpful tool for managing unaffordable federal student loan debt and avoiding the consequences of default… [and respondent] is required to follow specific procedures intended to ensure that borrowers are able to successfully navigate the enrollment and annual recertification processes required for IDR.” The AG alleged that the respondent violated state law by sending written notices that did not meet regulatory requirements and failed to send required notices.

    Under the terms of the settlement, respondent will (i) pay $1.8 million; (ii) include certain disclosures in renewal notice correspondence to borrowers; (iii) comply with requirements for FFELP loans owned by the DOE and enrolled in certain repayment plans; (iv) clearly disclosure to certain borrowers that failure to timely provide certain information about income or family size will result in increased monthly payments; and (v) retain copies of each written communication that it sends to borrowers regarding their IDR plans. The student loan servicer enters into this agreement for settlement purposes only (without admission).

    State Issues Massachusetts Student Loan Servicer Settlement Student Loans State Attorney General Income-Driven Repayment Lending Enforcement

  • Title lender reaches settlement with Pennsylvania AG

    State Issues

    On January 10, Pennsylvania AG Michelle Henry announced a settlement with a national auto title lending company, resolving alleged violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law and the Loan Interest and Protection Law (LIPL). According to the settlement, since 2016, the lender made thousands of vehicle title loans to Pennsylvania residents, with interest rates exceeding 100 percent without the necessary license required by the Consumer Discount Company Act.

    The AG also noted that some of the loans resulted from leads that they bought from third parties who purported to have physical offices in Pennsylvania, when in fact, neither the lender nor its lead generators were in Pennsylvania. The AG also said that most Pennsylvania-based borrowers drove to one of the lender’s Delaware locations. Nonetheless, the AG said, “Pennsylvania usury laws apply because [the lender] collected money from Pennsylvania consumers and repossessed vehicles in Pennsylvania.” In the settlement, the lender denies all allegations of unlawful conduct, including the assertion that it knowingly acquired leads from third parties leading to loans for Pennsylvania residents. The lender explained its position that until the U.S. Court of Appeals for the Third Circuit rendered its opinion in another matter in January 2022, it held a “good faith and reasonable belief” based on then-existing law, particularly the Commerce Clause of the U.S. Constitution, that its operations were lawful.

    Among other things, the settlement (i) requires the lender to pay $2.2 million in consumer restitution; (ii) requires the lender to cancel approximately $3.7 million in existing loans; (iii) enjoins and prohibits the lender from violating the LIPL; and (iv) requires the lender to return any repossessed vehicles at no charge and refund consumers of all repossession fees previously charged.

    State Issues Settlement Enforcement Pennsylvania State Attorney General Lending Title Loans Interest

  • OCC issues guidance on BNPL loans

    On December 6, the OCC posted Bulletin 2023-37 to provide banks with guidance on Buy Now, Pay Later (BNPL) loans. The OCC defined BNPL as point-of-sale or “pay-in-4” installment loan products. The OCC noted that, if BNPL products are used responsibly, they “can provide consumers with a low-cost, short-term, small-dollar financing alternative to manage cash flow.”

    The OCC emphasized that the banks should offer BNPL loans in accordance with standards for safety and soundness, treat customers fairly, provide fair access to financial services, and act in compliance with applicable laws and regulations. In the bulletin, the OCC highlighted the risks to banks associated with offering BNPL lending, including credit, compliance, operational, strategic, and reputational risks to banks. In particular, the bulletin also underscores the risks that borrowers may not fully understand their BNPL repayment obligations, the challenges of underwriting BNPL applicants who have limited or no credit history, the lack of standardized disclosure language, and the risks of merchant disputes, among other risks.

    The OCC recommended banks consider risk management practices, such as maintaining “underwriting, repayment terms, pricing, and safeguards that minimize adverse customer outcomes” tailored to the unique characteristics and risks of BNPL loans. The bulletin also advised banks to pay close attention to “the delivery method, timing, and appropriateness of marketing, advertising, and consumer disclosures,” in particular to ensure that all such documents clearly disclose the borrower’s obligations and any fees that may apply.

    Bank Regulatory Federal Issues Buy Now Pay Later Consumer Finance Lending Banking

  • 2nd Circuit affirms dismissal of whistleblower lawsuit alleging FCA violations

    Courts

    On October 30, the U.S. Court of Appeals for the 2nd Circuit affirmed a district court order dismissing a whistleblower lawsuit alleging violations of the False Claims Act (FCA). The three-judge panel concluded that they did not need to “address the public disclosure bar because the [second amended complaint]… fails to state a claim for a violation of the FCA.” According to the panel, the plaintiff did not allege that the defendant knowingly made a misrepresentation material to the government’s decision and that “failure to adequately plead either of these requirements is fatal to a relator's claim." 

    The original whistleblower complaint, filed in 2014, alleged that the defendant covered losses on loans that it acquired by taking advantage of a shared loss agreement with the FDIC.  The complaint also stated that the defendant knowingly reported write-downs on loans already paid off, sold, or irrelevant to the portfolio. The FDIC declined to intervene, and the case was dismissed. The plaintiff appealed and oral arguments were heard on October 12; however, the order found that the plaintiff failed to identify a false claim or false record and did not establish scienter or motive to commit fraud. 

    Courts Second Circuit Whistleblower False Claims Act / FIRREA Appellate Consumer Finance Lending FDIC

  • NY AG report reveals racial disparities in homeownership and offers proposed solutions

    State Issues

    On October 31, New York AG Letitia James released a report detailing racial disparities in homeownership and access to home financing in New York. The report states that Black and Latino New Yorkers are “underrepresented” among mortgage applicants, and white households are overall more likely to own homes than Black, Latino, or Asian households. The report also found that regardless of credit score, income, size of the loan and other factors, all applicants of color are denied mortgages at a higher rate than white applicants. In addition, the report found that disparities between white borrowers and borrowers of color persist in the context of refinance transactions and are also present in loans made by “[n]ew private-sector, non-depository lenders.”

    The report identified policy solutions that could reduce these disparities, including (i) subsidizing down payments and interest rates for first-generation homebuyers; (ii) increasing state funding for nonprofit financial institutions that support underserved communities of color; (iii) passing the New York Public Banking Act, which would create a regulatory framework for the establishment of public banks, thereby expanding access to affordable financial services in underserved areas; (iv) bolstering resources for government agencies to conduct fair lending investigations and enhancing New York’s Human Rights Law to explicitly prohibit discriminatory lending practices; and (v) exploring options for offering state-provided banking services in accessible locations to increase access to traditional banking services.

    State Issues New York State Attorney General Fair Lending Consumer Finance Lending FHA Refinance Racial Bias

  • CFPB sues nonbank mortgage lender for alleged HMDA and CFPA violations

    Federal Issues

    On October 10, the CFPB filed a lawsuit against a Florida-based nonbank mortgage originator for allegedly failing to accurately report mortgage data in violation of the Home Mortgage Disclosure Act (HMDA). According to the complaint, in 2019 the Bureau found that the lender violated HDMA by intentionally misreporting data regarding applicants’ race, ethnicity and gender from 2014-2017, which resulted in the lender paying a civil money penalty and taking corrective action. In this action, the Bureau alleges that during its supervision process, it found the lender submitted HMDA data for 2020 contained “widespread errors across multiple data fields” including 51 errors in 159 files and the lender violated a 2019 consent order condition that required it to improve its data practices. The alleged errors include (i) mistakes in inputting data concerning subordinate lien loans and acquired loans; (ii) inclusion of loans in HMDA reporting that did not meet the HMDA criteria for reportable applications; (iii) incorrect characterization of purchaser type for tens of thousands of loans; (iv) erroneous rate spread calculations, leading to errors in interconnected fields; (iv) inaccurate data related to lender credits; and (v) incorrect categorization of specific loan applications as “approved but not accepted” when they were, in fact, withdrawn, resulting in discrepancies in associated fields. Along with the HDMA violations and the violations of the 2019 consent order, the CFPB also alleges violations of the CFPA and requests that the court permanently enjoin the lender from committing future violations of HMDA, require the lender to take corrective action to prevent further violations of HMDA, injunctive relief, and the imposition of a civil money penalty.  

    Federal Issues CFPB Enforcement Lending Mortgage Lenders Mortgages Consumer Finance HMDA CFPA Data Collection / Aggregation

  • Michigan Supreme Court limits applicability of “usury savings clauses”

    Courts

    On June 23, the Michigan Supreme Court reversed a circuit court’s decision on a case involving Michigan’s “longstanding prohibition on excessive interest rates for certain loans.” The case involved a “usury savings clause,” which is a term sometimes used in notes, which requires the borrower to pay the maximum legal interest rate if the contractual terms impose an illegal rate.  In the case, a nonbank investment group (plaintiff) lent a realty service company (defendant) $1 million to flip tax-foreclosed homes. Plaintiff sued for breach of contract and fraud after defendant discontinued payments after paying more than $140,000 in interest on the loan. Defendant argued that plaintiff violated the criminal usury statute by, “knowingly charging an effective interest rate exceeding 25%,” which it alleged barred plaintiff from recovering on the loan under the wrongful-conduct rule.

    The circuit court determined that the fees and charges associated with the loan constituted disguised interest, making the total interest the plaintiff was seeking above the legal 25% limit and “criminally usurious.” However, the court agreed with the defendant that the usury savings clause was enforceable and the note was not facially usurious. Nevertheless, “the court agreed that the appropriate remedy is to relieve [defendant] of its obligation to pay the interest on the loan but not its obligation to repay the principal.”

    The Michigan Supreme Court held that in determining whether a loan agreement imposes illegal rates of interest, a usury savings clause is ineffective if the loan agreement requires a borrower to pay an illegal interest rate, even if the interest is labeled as a “fee” or something else. Further, the court held that enforcing usury savings clauses would undermine the state’s usury laws because it would nullify the statutory remedies for usury, which would relieve lenders of their obligation to ensure that their loans have a legal interest rate. The court also held that a lender is not criminally liable for seeking to collect on an unlawful interest rate in a lawsuit. The court reasoned that seeking relief through the court of law is generally encouraged over extrajudicial means. According to the opinion, the court held that “[t]he appropriate remedy for a lender’s abusive lawsuit is success for the borrower in that lawsuit and appropriate civil sanctions, not a criminal conviction for usury.”

    Courts State Issues Usury Consumer Finance Real Estate Mortgages Michigan Lending

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