A new lawsuit, filed by the CFPB and the New York Department of Financial Services (NY DFS) in a California federal court against two pension advance companies and three of the companies’ individual managers, again demonstrates the aggressive approach taken by both agencies. The lawsuit follows a consumer advisory issued by the CFPB in March 2015 regarding “pension advance traps to avoid.”
The complaint alleges that the defendants offered consumers pension advances in the form of “lump-sum payments that consumers could receive in return for agreeing to redirect all or part of their pension payments, over eight years, to repay the funds.” The CFPB and NY DFS allege that the defendants engaged in unfair, deceptive and abusive practices in violation of the Consumer Protection Act by, among other things:
- Failing to disclose or misrepresenting the interest rate and fees for the loans. The complaint alleges that the defendants represented that the transactions did not involve the payment of interest when they had an average effective annual interest rate of 28.56%. It also alleges that the defendants failed to disclose associated fees and represented that the transactions had a cost comparable to loans with interest rates substantially lower than the alleged effective rate.
- Misrepresenting that the transactions were asset purchases and not loans. The complaint alleges that the companies represented to consumers that the transactions were not loans and instead that the defendants were purchasing consumers’ future pension income.
The complaint also includes various state law claims asserted only by the NY DFS. The NY DFS alleges that the defendants violated New York usury laws, engaged in false and misleading loan advertising in violation of the New York Banking Law, and intentionally misrepresented a material fact (i.e. that they purchased pension income and there was no interest rate) in violation of the New York Financial Services Law.
The complaint includes allegations that the defendants solicited investors to invest in the transactions and paid investors from pension payments deposited into checking accounts of consumers who entered into transactions with the defendants. In the complaint, the NY DFS alleges that by transmitting money from consumers’ accounts to investors, the defendants were engaged in the business of money transmitting. New York Banking Law requires a person engaged in money transmitting to be licensed as a money transmitter unless such person is acting as the agent of a licensee or a payee. The NY DFS claimed that the defendants were in violation of such law because they were not licensed as a money transmitter or appointed agents of a licensee or the investors.
While the complaint charges that the transactions in question were loans rather than asset purchases, it does not specify that the pensioners had any liability to the pension advance companies in the event the pension payments were smaller than anticipated. Indeed, the complaint recites that the defendant companies purchased insurance against the risk of premature death (and cessation of pensions) of the pensioners.
The action clearly raises questions about whether the CFPB, NY DFS, or other regulators might bring similar claims against providers of merchant cash advances, litigation funding companies and other firms that purchase uncertain future revenue streams at a discount. Structured properly, the products offered by these companies are not loans or absolutely repayable obligations.
In the instant case, the CFPB and NY DFS allege a number of troubling facts about the representations made by the defendant companies. And bad facts often make bad law. However, even if the CFPB and/or NY DFS prevail in their contention that the pension purchases in these cases were disguised loans, there are several important distinctions between the pension advance products at issue here and other products offered outside of lending laws.
First, the pension advances in this case are consumer transactions, not commercial transactions over which the CFPB and other regulators have limited jurisdiction. Second, because they involve pensions, they trigger the “hot button” issue of elder abuse which draws significantly greater regulatory scrutiny than business transactions. Third, as the complaint acknowledges, pension payments are not assignable, so the transactions did not include an actual assignment of the future revenue stream at the time the advance was made, which clearly would make the future revenue stream the property of the advance company. Instead, they imposed a contractual obligation for the consumer to forward future payments to the pension advance company when received, making the transaction look more like a loan. Finally, the pension advances had a defined time period during which pension payments had to be remitted, substantially impairing the finance company’s ability to argue that the product has no interest rate, no payment schedule, and no absolute repayment requirement, as is the case of a properly designed merchant cash advance.
Since opening its doors for business, the CFPB has been aggressively testing the limits of its jurisdiction. Earlier this month, we conducted a webinar: “Pushing the Envelope: Are There Limits to the CFPB’s Jurisdiction?” in which we discussed the CFPB’s continuing “jurisdiction creep” and explored the limits of the CFPB’s jurisdiction.