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CFPB bootstraps purported state law violations into attack on online payday lending companies

Posted in CFPB Enforcement, Payday Lending

The CFPB has broken new ground in an attack in Massachusetts federal court against CashCall, several related companies and their principal.  The companies funded, purchased, serviced and collected online payday loans made by a tribally-affiliated lender the CFPB did not sue.  The defendants were charged with engaging in unfair, deceptive and abusive acts and practices (UDAAP) in seeking to collect loans that were purportedly void in whole or in part under state law.  Not only does this lawsuit represent the CFPB’s first lawsuit against companies involved in online payday lending, it breaks new ground by asserting UDAAP violations as a result of alleged violations of state law. 

In his prepared remarks on the lawsuit, Director Cordray called the filing “a significant step in the Consumer Bureau’s efforts to address regulatory evasion schemes that are increasingly becoming a feature of the online small-dollar and payday lending industries.”  While Director Cordray focused on the CFPB’s effort to eliminate problematic payday lending, the CFPB’s legal theory has implications extending well beyond online payday lending. 

The CFPB complaint alleges that the loans in question were void in whole or in part as a matter of state law because the lender charged excessive interest and/or failed to obtain a required license.  The complaint identified eight states with laws of this kind—Arkansas, Arizona, Colorado, Indiana, Massachusetts, New Hampshire, New York and North Carolina—with laws of this kind and alleged that the effort to collect amounts in excess of the amounts lawfully due under state law was “unfair,” “deceptive” and “abusive” as a matter of federal law.  In addition to permanent injunctive relief, the complaint seeks civil monetary penalties in unspecified amounts and restitution of all interest, fees and principal collected from consumers under loans “to the extent that they were void, uncollectible, or not subject to a repayment obligation under state law.” 

CashCall’s attorneys, in a statement about the lawsuit, characterized it as inconsistent with the Dodd-Frank provision that prohibits the CFPB from setting usury limits and “an affront to the Indian tribes’ sovereign right to regulate their own economic affairs.”  They promised to vigorously defend the lawsuit.

The CFPB’s filing is part of a concerted crackdown on online payday lenders, or at least the portion of the industry that disregards the laws of the states where borrowers reside.   Recent developments include:

  • According to Director Cordray, at least 13 states have filed formal actions against CashCall, one of the defendants in the new CFPB case.  Concurrently with the CFPB’s announcement, the Colorado Attorney General announced that he had filed a lawsuit against the defendants in Colorado state court. 
  • New York’s Department of Financial Services (NYDFS) has raised concerns about online payday loans with banks processing ACH payments, debt collectors and NACHA, the organization that administers the ACH network.  At least partly in response to efforts by federal and state authorities to deny ACH privileges to online payday lenders that disregard state law, NACHA recently proposed changes to its rules.
  • Last month, the New York Attorney General entered into a settlement requiring the payment of restitution and civil penalties by debt collectors that collected payday loans.
  • Yesterday, the New York AG announced a settlement with an internet auto title lender whose loans allegedly violated New York usury laws.  The settlement requires the lender to write off all loans with a current balance and pay restitution of all interest and fees and penalties.
  • Last month, the CFPB filed an amicus brief in the Second Circuit in support of a lower court ruling refusing to enter a preliminary injunction seeking to block the NYDFS from taking actions against online tribal lenders and their business partners.
  • In September 2013, the CFPB issued an order denying a petition of three tribal payday lenders asking the CFPB to set aside civil investigative demands (CIDs) against them.  In the order, the CFPB rejected the lenders’ argument that they were not subject to the CFPB’s CID authority because they were affiliated with, and “arms” of, Indian tribes. 

In short, it is a tough time for online tribal, “choice of law” and off-shore lenders.  It may soon be a tough time for other financial services companies whose state-law compliance is less than stellar.