A Vermont federal district court recently issued a decision ruling on the defendants’ motion to dismiss a class action involving allegations that an online tribal lending venture violated federal and state law because of alleged usurious interest rates and other allegedly unlawful features. The decision discusses a wide array of procedural issues, including the enforceability of the arbitration provisions in the plaintiffs’ loan agreements.
Among the noteworthy substantive issues addressed in the decision are whether the Consumer Financial Protection Act (CFPA) created a private right of action and whether the loan agreements violated the Electronic Fund Transfer Act (EFTA) prohibition on conditioning credit on preauthorized electronic fund transfers (EFTs), such as ACH or debit card payments. In dismissing the plaintiffs’ CFPA claim, the court agreed with the defendants that the CFPA does not provide a private cause of action. The court noted that while the CFPA expressly authorizes enforcement actions by state attorneys general and state regulators, it is silent on private remedies. The court observed that “legislative silence on such an issue is most frequently regarded by courts as an expression of legislative intent to exclude private remedies.”
Although the court granted the defendants’ motion to dismiss one plaintiff’s EFTA claim because it was asserted beyond the EFTA’s one-year statute of limitations, the court found that the other plaintiff had alleged facts that could support her EFTA claim. The defendants’ loan agreement provided that funding of the loans through an electronic transfer “as soon as the next business day” was conditioned on the authorization of payments through recurring (preauthorized) ACH payments, whereas borrowers electing to pay by money order or certified check would have their loans funded by mail in “up to 7 to 10 days.” The plaintiff argued that the choice between next-day funding with a recurring ACH election and delayed funding with a payment by mail election was a “false choice.” The defendants argued there was no EFTA violation because ACH authorization was not the only way a borrower could obtain a loan.
The court determined that the EFTA issue was “fact-specific and not one which could be resolved on a motion to dismiss.” The court observed that the plaintiff might be correct that the defendants “have so obstructed the choice of repayment by check with delay” that the option was a “false choice.” It also commented that “given the nature of the loan itself-immediate cash at very high interest rates-it seems unlikely that Defendants ever funded a loan to any borrower with repayment by check.” Nevertheless, the court ruled that “it remains for discovery and for fact-finding to determine if the loan agreement is drafted so as to skate around the restrictions of EFTA.”
To be sure, the EFTA strategy adopted by the defendants in this case was highly aggressive. A range of less aggressive options remain available to creditors, including: (1) providing an election between EFT repayment and repayment by remotely created checks or credit cards; (2) charging a cost-related pricing differential between an EFT election and an election to repay some other way; and (3) freely allowing repayment by check or some other method but requiring the borrower to authorize a backup payment by EFT any time a payment is not otherwise received by the due date. All of these methods—and others—require careful analysis and drafting, as well as solid legal and practical judgment concerning risks and benefits.