The CFPB and the South Carolina Department of Consumer Affairs have filed a lawsuit in federal district court in South Carolina against two companies and their individual owner that alleges the defendants violated the Consumer Financial Protection Act and the South Carolina Consumer Protection Code (SCCPC) by brokering high-interest loans to consumers that were marketed as purchases of the consumers’ future pension or disability payments. The complaint alleges that the majority of the transactions involved veterans with federal disability pensions or other pensions issued to veterans. It also alleges that the defendants assessed the creditworthiness of consumers before entering into the transactions and allowed consumers to repay the contracts from sources other than the contracted-for income streams.
The complaint alleges that the defendants violated the CFPA by:
- 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 and South Carolina law prohibits assignments of pensions as security for payment of a debt arising out of a consumer loan
- Misrepresenting to consumers that the transactions were sales when, in fact, they were high-interest credit offers
- Failing to inform consumers about the interest rates on the transactions (which is alleged to be an unfair act or practice)
The complaint alleges that the defendants violated the SCCPC by:
- Engaging in the business of making supervised loans (i.e. consumer with loan finance charges greater than 12% per year) without a license
- Failing to file notification with the SC Department of Consumer Affairs within 30 days of after commencing to make consumer loans in the state
- Brokering contracts in which investors took assignments of pensions as security for payment of a debt arising out of a consumer loan
- Engaging in unconscionable debt collection by filing actions for breach of contract and specific performance when they knew or should have known the transactions were prohibited by SC law
The CFPB has already announced two settlements this year involving brokers of transactions alleged to be high-interest loans to veterans that were marketed as purchases of the future pension or disability payments, one in January 2019 and the other in August 2019 (with the Arkansas Attorney General also a party).
The new complaint indicates that companies whose products are structured as purchases rather than loans remain a CFPB focus under Director Kraninger’s leadership, particularly where the products are marketed to veterans. 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 true of other enforcement authorities, such as state AGs.)