The CFPB filed a complaint in a South Carolina federal district court against Upstate Law Group LLC. and two of its individual owners and managers that alleges the defendants violated the Consumer Financial Protection Act’s UDAAP prohibition in connection with the brokering of pension advance products structured as purchases by engaging in unfair and deceptive acts or practices and by providing substantial assistance to others who had engaged in deceptive and unfair acts or practices in violation of the UDAAP prohibition. In filing the complaint, the CFPB was joined by the South Carolina Department of Consumer Affairs (SCDCA) and the Arkansas Attorney General.
The complaint also includes a count brought only by the SCDCA alleging the defendants violated the South Carolina Consumer Protection Code by engaging in unconscionable debt collection. As discussed below, the Bureau has previously targeted companies that brokered pension advance products structured as purchases. The new lawsuit indicates that the Bureau is also targeting service providers to such companies.
The complaint alleges that the defendants worked with three other companies (Broker Companies) that brokered high-interest loans to consumers that were marketed as purchases of the consumers’ future pension or disability payments, where the majority of such consumers were veterans with federal disability pensions or other pensions issued to veterans. The Bureau filed a lawsuit against one of the Broker Companies in October 2019 and entered into settlements with the two other Broker Companies in January 2019 and August 2019. The Bureau alleged that all of the Broker Companies violated the CFPA’s UDAAP prohibition through conduct that included:
- misrepresenting to consumers that the transactions were sales when, in fact, they were high-interest credit offers
- misrepresenting to consumers that the brokered contracts were valid and enforceable when, in fact, they were void and illegal because federal law prohibits the assignments of veterans pensions
- failing to inform consumers about the interest rates on the transactions
In the new lawsuit, the CFPB alleges that the defendants knowingly or recklessly provided substantial assistance to the Broker Companies in violation of the CFPA by actions that included: (i) developing a pre-approval or risk-assessment process for the transactions and conducting underwriting; (ii) approving or denying consumers’ applications to enter into the transactions; (iii) directing and administering the execution of the contracts, (iv) serving as the payment processor for the initial lump-sum payment to consumers and for fees paid to the Broker Companies and the defendants; and (v) serving as a payment processor by tracking and controlling the collection and distribution of payments on the transactions. The Bureau alleges that the defendants knew or should have known that the Broker Companies were engaging in the alleged unlawful conduct because they were aware of publicly-available cease and desist orders issued against the Broker Companies by state regulators and “private lawsuits attacking the business model of the Broker Companies and other companies with similar business models.” The lawsuit is not the first enforcement action by the Bureau against brokers in this industry. In September 2017, the CFPB negotiated a consent order with a company that brokered certain types of settlement advances paid to consumers. Ballard Spahr represented the parties in that action.
The CFPB also alleges that the defendants directly engaged in deceptive acts or practices in violation of the CFPA by initiating ACH debits to consumers’ bank accounts, demanding payments from consumers through letters and other communications, and filing suit against consumers who failed to make payments. The Bureau alleges that through these actions, the defendants represented, expressly or impliedly, that consumers were legally obligated to make payments in accordance with the terms of the contracts when, in fact, the contracts were void from inception.
The CFPB’s complaint seeks injunctive relief, restitution, damages, disgorgement, and civil money penalties.
The new lawsuit indicates that not only companies offering financial products structured as purchases should expect continued CFPB scrutiny under Director Kraninger’s leadership, particularly where the products are marketed to veterans, but also indicates that service providers to such companies should expect such scrutiny. It is also a reminder of the need for all players in this space, including litigation funding companies and merchant cash advance providers, to revisit true sale compliance, both in the language of their agreements and in the company’s actual practices. While the CFPB’s jurisdiction over small business finance is limited, this is not necessarily true of other enforcement authorities, such as state AGs or regulators. (As part of his FY 2021 New York State Executive Budget, Governor Cuomo has proposed to amend the definition of “financial product or service” in the state’s Financial Services Law to include “any merchant cash advance provided to a consumer or small business,” thereby expanding the Department of Financial Services’ authority to include such merchant cash advances.)