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CFPB/NY AG lawsuit against RD Legal Funding may signal greater scrutiny of non-loan financial products such as merchant cash advances

Posted in CFPB Enforcement, Small Business

The CFPB and the New York Attorney General this week filed an action against RD Legal Funding, LLC, two of its affiliates, and their principal (collectively, “RD”), alleging that a litigation settlement advance product offered by RD is a disguised usurious loan that is deceptively marketed and abusive.  In particular, the Complaint alleges that the transactions were falsely marketed as assignments rather than loans, that the transactions violate New York usury laws, and that RD misrepresented when the funding would be provided and falsely claimed that it could “expedite funding and ‘cut through red tape’” associated with the settlements being financed.  The Complaint alleges that the transactions could not be assignments because the underlying settlements expressly prohibit assignment of claimant recoveries.

In the Complaint, both the CFPB and the AG allege several deception claims and an abusiveness claim under Sections 1031 and 1042 of Dodd-Frank.  The AG also alleges state law claims for civil and criminal usury, fraud, and violation of NY UDAP statutes.  Notably, one of the deception claims alleged by the CFPB is predicated on alleged state usury law violations, implicating one of several issues involved in the pending CashCall appeal.

The CFPB and the AG issued press releases and prepared remarks trumpeting the RD Legal Funding action as a defense of 9/11 heroes and NFL concussion victims who were “scammed” through “convoluted contracts.”  The public statements also focus on the cost of the financing, providing examples such as a 9/11 first responder who paid $15,000 on an advance of $18,000 when the settlement funds ultimately were received six months after the advance was made.

Before the lawsuit was filed, on January 4 of this year, two of the RD entities filed separate preemptive actions for declaratory and injunctive relief against the CFPB and the AG.  Among other things, these complaints challenge the CFPB’s jurisdiction over RD and the propriety of the AG’s threatened enforcement activity on the basis that RD does not extend credit, but rather engages in bona fide purchases of receivables.  The complaints quote extensively from the relevant agreements, including the assignment provisions and non-recourse language, neither of which appear to be “convoluted” as the CFPB and AG allege.  The complaint against the CFPB also attaches a prior Civil Investigative Demand served on RD.

While the action filed this week may have been driven primarily by the sympathetic facts alleged in the Complaint, it may foreshadow a broader enforcement effort by the CFPB, state Attorneys General, and other state regulators directed at litigation funding companies, merchant cash advance providers, and other finance companies whose products are structured as purchases rather than loans.  (While the CFPB’s jurisdiction over small business finance is limited, this is not true of other enforcement authorities, such as state AGs.)  Notably, the CFPB previously has taken action against structured settlement and pension advance companies, in the former case leading to a jurisdictional challenge supported by the U.S. Chamber of Commerce.  It therefore is critical for all players in this space to revisit true sale compliance, both in the language of their agreements and in the company’s actual practices.