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Federal Court in North Dakota Dismisses CFPB Complaint Against Payment Processor for Insufficient Factual Allegations
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.”
District Court Denies Injunction Against “Operation Choke Point” Activities
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.”
Georgia Attorney General Orders Payday Lenders to Pay $40 Million in Civil Monetary Penalty and Restitution to Consumers
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.
CFPB Orders Payday Lender to Pay Over $500k in Civil Monetary Penalty and Restitution to Customers
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.”
FTC Announces $1.3 Billion Judgment Against Payday Lenders
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.
FTC Issues Paper on Lead Generation, Recaps "Follow the Lead" 2015 Workshop
On September 15, the FTC issued a paper summarizing the insights garnered through its October 2015 “Follow the Lead” workshop on lead generation. As previously covered in InfoBytes, the workshop focused on lead generation issues in the mortgage and education lending space. The FTC paper “detail[s] the mechanics of online lead generation and potential benefits and concerns associated with lead generation for both businesses and consumers.” The paper provides a synopsis of payday lenders’ role in the lead generation industry by describing their use of the “ping tree,” an automated process that enables aggregators to sell consumers’ personal information to lenders or other aggregators. Although the paper acknowledges that lead generators provide potential benefits to consumer, including the ability to offer competitive prices in the mortgage lending space, it never-the-less identifies the following key areas of concern: (i) complexity and lack of transparency surrounding industry policies and processes; (ii) the use of potentially aggressive or deceptive marketing techniques; and (iii) the potential misuse and mishandling of consumers’ personal information in the payday lending space.
CFSA Releases Positive Payday Loan Testimonials Submitted to the CFPB
On September 6, the Community Financial Services Association of America (CFSA) released a 2,000-plus page document containing testimonials submitted to the CFPB regarding consumers’ positive experiences with the payday loan industry. A CFSA representative uncovered the allegedly “buried” stories through a Freedom of Information Act (FOIA) request filed December 31, 2015. According to the CFSA, of the newly discovered 12,546 consumer comments regarding to the payday loan industry, 12,308 “praised the industry and its products and services, or otherwise indicated positive experiences.” Among other things, the CFSA further noted that (i) since the CFPB implemented its consumer complaint portal in 2011, approximately 1.5% of all complaints received related to the payday loan industry; (ii) in an FTC 2015 summary of consumer complaints, the “FTC found that just 0.003% of more than three million complaints related to payday lending”; and (iii) at least two customer surveys reveal that payday loan borrowers are overwhelmingly satisfied with the product. Regarding the CFPB’s proposed rules to address the short-term lending industry, CFSA CEO Dennis Shaul commented, “[i]t is clear that millions of consumers are satisfied with the payday loan product and services, and do not want the federal government to take this valued credit option away from them.”
North Carolina AG Announces $9 Million Settlement with Online Lenders
On June 21, North Carolina AG Roy Cooper, together with Commissioner of Banks Ray Grace, announced a settlement with two online lenders to resolve allegations that they violated state usury laws. According to the complaint, the lenders offered North Carolina consumers personal loans of $850 to $10,000 and charged annual interest rates of approximately 89 to 342 percent, significantly exceeding the rates allowed under state law. In 2015, Special Superior Court Judge Gregory P. McGuire issued a preliminary injunction to ban the companies from making or collecting loans in North Carolina. In addition to permanently barring the companies from collecting on loans made to North Carolina borrowers, the consent judgment requires the companies to (i) cancel all loans owed by North Carolina consumers; (ii) have the credit bureaus remove negative information on consumers’ credit reports related to the loans; (iii) pay $9,025,000 in refunds to North Carolina consumers, with the remaining $350,000 of the settlement allocated to covering the costs of the investigation, lawsuit, and administering the settlement; and (iv) cease unlicensed lending in North Carolina. The settlement represents North Carolina’s first successful action to ban an online payday-type lender that used affiliation with an Indian tribe in an effort to evade state usury laws.
CFPB Releases Report on Supplemental Findings on Payday, Vehicle, and Installment Loans
On June 2, the CFPB released a report with various analyses of payday loans, payday installment loans, vehicle title loans, and deposit advance products. The report’s six chapters examine: (i) consumer usage and default patterns for vehicle title installment loans and payday installment loans; (ii) consumer account activity before and after the discontinuation of deposit advance products, analyzing whether consumers who used such products “overdrew their accounts or took out payday loans more frequently after banks stopped offering the products”; (iii) the impact of varying state laws on storefront payday lending in Texas, Colorado, Washington, and Virginia; (iv) the share of payday loans that are reborrowed across states, comparing it to varying limits on renewals and requirements for cooling-off periods between the loans; (v) borrower and default patterns for storefront payday loans for three alternative definitions of the loan sequence concept; and (vi) a series of simulations regarding the estimated impacts of certain requirements on the payday, payday installment, and vehicle title loan markets. On June 2, the CFPB simultaneously released its Proposed Rule on Payday, Title, and Installment loans; to review BuckleySandler’s full coverage on the proposal, please see the Special Alert: CFPB’s Proposed Rule Regarding Payday, Title, and Certain Other Installment Loans.
The CFPB’s recent supplemental report comes after its April 20 report titled “Online Payday Loan Payments” and its May 18 report titled “Single-Payment Vehicle Title Lending.”
Special Alert: CFPB's Proposed Rule Regarding Payday, Title, and Certain Other Installment Loans
On June 2, 2016, the CFPB published its proposed rule (the “Proposed Rule”) addressing payday loans, vehicle title loans, and certain other installment loans (collectively “covered loans”). This alert summarizes the Proposed Rule and compares the Proposed Rule to the CFPB’s March 26, 2015 outline released pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA). Those wishing to comment on the Proposed Rule must do so by September 14, 2016.
Summary of the Proposed Rule
The Proposed Rule is issued pursuant to the CFPB’s authority under section 1031 of the Dodd-Frank Act to identify and prevent unfair, deceptive, or abusive acts or practices. It defines two types of covered loans: (1) “short-term” loans that have terms of 45 days or less; and (2) “longer-term” loans with terms of more than 45 days that have a “total cost of credit” exceeding 36% and either a “leveraged payment mechanism” or a security interest in the consumer’s vehicle. A “leveraged payment mechanism” includes a right for the lender to initiate transfers from the consumer’s account and certain other payment mechanisms. The Proposed Rule would exclude (i) credit extended for the sole and express purpose of financing a consumer’s initial purchase of a good when the credit is secured by the property being purchased; (ii) credit secured by any real property or by personal property used or expected to be used as a dwelling; (iii) credit cards; (iv) student loans; (v) non-recourse pawn loans; and (vi) overdraft services and lines of credit.
The Proposed Rule would make it an abusive and unfair practice for a lender to make a covered short-term or longer-term loan without determining upfront that the consumer will have the ability to repay the loan (the “full-payment test”). For both types of covered loans, the Proposed Rule would require a lender to determine whether the consumer can afford the full amount of each payment of a covered loan when due and still meet basic living expenses and major financial obligations. As a practical matter, the full-payment test imposes restrictions on rollovers, loan sequences, and refinancing by preventing the offering of short-term loans fewer than 30 days after payoff without a showing that the borrower’s financial situation is materially improved (and capping successive short-term loans at 3 before requiring a 30-day cooling off period), and preventing the refinancing of longer-term loans without a showing that payments would be smaller or would lower the total cost of credit. The Proposed Rule also would provide conditional exemptions for certain covered loans meeting specified criteria, as discussed further below. These conditional exemptions essentially provide alternative compliance options to the Proposed Rule’s full-payment test. Additionally, the Proposed Rule would require lenders to use and furnish information to registered information systems established to track covered loans.
Click here to view the full Special Alert.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- John P. Kromer, (202) 349-8040
- Walter E. Zalenski, (202) 461-2910
- Marshall T. Bell, (202) 461-2997