The California Department of Business Oversight (DBO) has published a second round of modifications to its proposed regulations under the State’s Student Loan Servicing Act.  As previously covered, the DBO published its first round of revised rules last month.

The latest revisions to the regulations clarify servicer responsibilities related to application of payments, borrower communications and handling of qualified written requests (QWRs), and recordkeeping requirements, among other miscellaneous changes.


The initial regulations provided that a servicer must credit any online payment the same day it is paid by the borrower, if paid before the daily cut off time for same day crediting posted on the servicer’s website, or the next day, if paid after the posted cut off time.  These requirements, which were unmodified by the first round of revisions, have now been changed to clarify that servicers must only apply payments the same or next business day, depending on whether received before or after the published cut off time.

Borrower Communications and Qualified Written Requests

The Act requires that a servicer respond to QWRs by acknowledging receipt of the request within five business days and, within 30 days, providing information relating to the request and an explanation of any account action, if applicable.  The first round of revised regulations added the limitation that a servicer is only required to send a borrower a total of three notices for duplicative requests.  The latest revisions add two additional provisions.  First, servicers are only required to send an acknowledgement of receipt within five days if the action requested by the borrower has not been taken within five days of receipt.  Second, servicers may designate a specific electronic or physical address to which QWRs must be sent.  If designated, however, this information must be posted on the servicer’s website.

The revised regulations also further specify what is required of customer service representatives.  Now, federal and private loan servicer representatives must inform callers about alternative repayment plans if the caller inquires about repayment options.  Federal loan servicers must now also inform callers about loan forgiveness benefits, if the caller inquires about repayment options.  These regulations have evolved significantly.  The initial regulations required that representatives “be capable of discussing” alternative repayment plan and loan forgiveness benefits with callers, and be trained in the difference between forbearance and alternative repayment plans.  The latest revisions have added specific triggers for discussing repayment options—and forgiveness benefits for federal loans.

Servicer Records

The first round of revisions eliminated the DBO’s specific record keeping formatting requirements.  In its place, the latest round of revisions has added the general requirement that the books and records required by the act must be maintained in accordance with generally accepted accounting principles.  The new revisions also change the information required as part of the aggregate student loan servicing report to require the number of monthly payments required to repay the loan.

The modifications are subject to comment until July 25, 2018.  As with the first round, the revisions will not be effective until approved by the Office of Administrative Law and filed with the Secretary of State.

The New York Department of Financial Services (NYDFS) has issued an Online Lending Report that calls for the application of New York usury limits to all online lending and increased regulation of online lenders making loans to New York consumers and small businesses.

On August 22, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar to discuss the report.  Click here to register.

A bill signed by New York Governor Cuomo required the NYDFS to study online lending in New York and issue a public report of its findings and recommendations by July 1, 2018. The report indicates that to gather data, the NYDFS asked 48 businesses believed to be engaged in online lending activities in New York to complete a “New York Marketplace Lending Survey.” The NYDFS received responses from 35 of those 48 businesses.  According to the report, the respondents varied in size “from small to some of the largest online lenders in the industry,” and of the 35 respondents, 28 were not currently licensed by the NYDFS and 7 were licensed by the NYDFS.

The report includes a background discussion of the NYDFS’s  supervisory authority and New York usury limits, payday lending, “lessons from the financial crisis,” “New York’s leadership in consumer protection,” and consumer litigation financing.  It also sets forth the survey results, which cover consumer and business loans and consist of statistical and other information about (1) customer and loan numbers, (2) duration of loans, (3) loan sizes, (4) APRs, (5) fees, costs, expenses, and other charges, (6) loan delinquencies (past due 30 days or more), (7) business models, (8) marketing and advertising, (9) credit assessment/underwriting, and (10) complaints and investigations.

The NYDFS had listed topics to be addressed in the report on its website and solicited public comments on such topics.  In the report, the NYDFS also summarizes the 12 comments it received in response to that solicitation.  The NYDFS describes the commenters as “technology and lending associations, chambers of commerce, business associations, and banking, mortgage and credit union associations.”

The report concludes with a discussion of the benefits and risks associated with the lending activities and practices of online lenders based on the survey results followed by the NYDFS’s conclusions and recommendations.  Most of these recommendations will require legislation.

Key items in the report consist of the following:

  • Application of consumer protection laws to small business loans.  The NYDFS recommends that New York consumer protection laws and regulations “should apply equally to all consumer lending and small business lending activities.” According to the NYDFS, such protections include laws and regulations relating to transparency in pricing, fair lending, fair debt collection practices, and data protection.  The NYDFS further states that its “equal application” recommendation “includes robust consumer disclosures; the use of technology easily permits transparency, including disclosures of the full cost of a loan to a borrower and providing the consumer with full understanding of the long-term consequences of accepting short-term relief for a financial need.”  The NYDFS acknowledges that under existing federal law, small business loans are generally exempt from coverage.  To our knowledge, no state has ever subjected small business loans to the same regulations as consumer loans.  The report is devoid of any empirical data supporting this extreme recommendation.  The report does not even mention, let alone address, the risk that subjecting small business loans to the same state statutes that apply to consumer loans may lead to a reduction in the availability of small business loans and an increase in pricing for such loans. The NYDFS does not even define what would be considered a “small business loan.”
  • Application of New York usury laws to all online lending.  The NYDFS recommends the application of New York usury law “to all lending in New York.”   According to the NYDFS, “a loan is a loan from a borrower’s perspective, and  the borrower deserves to get the benefit of New York’s protections, whether the borrower borrows from a bank or credit union or from an online lender.”  While the report acknowledges that out-of-state banks are exporting their interest rates into New York, the report cavalierly suggests that, contrary to well-established U.S. Supreme Court precedent, New York can nevertheless apply its usury limits to such loans.  The recommendation follows earlier discussions in the report in which (1) the NYDFS observes that “a number of online lenders” have partnered “with federally chartered banks, or FDIC-insured banks located  in jurisdictions that do not have interest rate protections on par with New York’s” to expand their consumer lending “through their online platforms without regard to the type of loan offered, the size of the loans or the interest rates charged,” (2) the NYDFS expresses its support for the use of the “true lender theory” to challenge claims by such online lenders that loans they have made in partnership with banks are not subject to New York usury law, and (3) the NYDFS describes the Second Circuit’s holding in Madden v. Midland Funding that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge, but makes no mention of the fact that the OCC believes Madden was wrongly decided.

Thus, in recommending that “all lending in New York” be subject to New York usury laws, the NYDFS appears to be taking the position that no online lender partnering with a bank can permissibly rely on the bank’s federal law power to export interest rates to charge the interest the bank is permitted to charge on loans the bank has assigned to the online lender when such interest exceeds New York usury limits. The NYDFS also notes its opposition to H.R. 4439, the “Modernizing Credit Opportunities Act,” which is intended to address the uncertainty created by “true lender” challenges.  (A group of 21 state attorneys general recently sent a letter to the Senate majority and minority leaders as well as to the chairman and ranking member of the Senate Banking Committee urging them to reject H.R. 4439 and H.R. 3299, the “Protecting Consumers’ Access to Credit Act of 2017,” a bill often referred to as the “Madden fix” bill.)

The NYDFS also appears to be willing to ignore the comments it discusses in the report highlighting the importance of the access to credit that online lending provides to consumers and small businesses.  The NYDFS’s recommendation is likely to further reduce credit availability for New York consumers and small businesses.  Indeed, a recent study showed that credit availability contracted sharply in Connecticut, Vermont, and New York after Madden was decided. See Colleen Honigsberg, Robert J. Jackson, Jr., and Richard Squire, “The Effects of Usury Laws on Higher-Risk Borrowers,” Columbia Business School Research Paper No. 16-38 (May 13, 2016).

  • Expansion of licensing and supervision.  New York law currently requires a nonbank lender to obtain a “Licensed Lender” license if it makes consumer purpose loans of $25,000 or less or business purpose loans of $50,000 or less and the interest rate is greater than 16% (New York’s civil usury limit). The NYDFS comments in the report that “given the low level of national interest rates in recent years, certain online lenders have been able to offer profitable rates under New York’s usury limit such that they would not be required to be licensed and overseen by the Department.”  The NYDFS expresses its continued support for legislation that would “reduce the interest rate above which a non-depository lender is required to be licensed to 7 percent per annum from 16 percent per annum.”
  • Scrutiny of consumer litigation financing.  The NYDFS “notes the growth of consumer litigation financing” and expresses concern “about the amounts that consumers are required to provide to financing companies, which can be a significant portion of the total recoveries from their lawsuits that would be usurious if lending rules were to apply.”  It also expresses concern “about the information many companies provide to consumers about the transactions and the manner in which they provide that information.”  The NYDFS calls for further study of these issues and  expresses its belief that “legislation could provide important safeguards for consumer that do not currently exist.”  The NYDFS does not provide a scintilla of empirical data for its apparent conclusion that legislation containing consumer safeguards is necessary.  It should be noted that the discussion of litigation financing consists of just one paragraph of a 31-page report.


The New York City Department of Consumer Affairs (DCA) has adopted new rules for used car dealers, requiring all licensed dealers to make additional disclosures to consumers and creating a new consumer bill of rights for the industry. The new rules went into effect on June 24, 2018.

Under the new rules, dealers must provide a financing statement in a prescribed form prior to the execution of any retail installment contract (RIC).  The form includes “sale terms,” “financing terms,” and pricing information for any add-on products or services. The financing terms must include two annual percentage rates: the contract APR (which presumably is the APR for the financing that the buyer will actually be receiving and will be the APR that is disclosed in the TILA disclosures that are part of the buyer’s RIC) and the “lowest APR offered to buyer by any finance company with the same term, number of payments, collateral, and down payment” (which presumably is intended to reveal to the buyer if the dealer could have obtained comparable financing for the buyer at a lower APR).

Consumers must also be given an automobile contract cancellation option form that offers a consumer a two-weekday cancellation period. A consumer may use this form to cancel the purchase and receive a full refund.

Finally, the new rules create a “Used Car Consumer Bill of Rights,” a copy of which must be provided to each consumer and posted conspicuously anywhere contracts are negotiated or executed. The posting should be made in English and any other language in which the dealer does business, so long as the DCA has issued a version of the bill of rights in that other language.

RD Legal Funding and the New York Attorney General have filed a joint submission with Judge Preska of the Southern District of New York regarding how they propose to proceed in the CFPB’s and NYAG’s lawsuit against RD Legal Funding.

On June 18, Judge Preska issued an order denying RD Legal Funding’s motion to dismiss the NYAG’s federal UDAAP claims under the CFPA and state law claims but terminating the CFPB’s participation in the case as a consequence of her determination that because the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, the CFPB lacked authority to bring claims under the CFPA.  In Judge Preska’s view, the proper remedy was to strike the CFPA (Title X of Dodd-Frank) in its entirety rather than just sever the for-cause removal provision.  Her June 18 order also set yesterday as the deadline for counsel to advise the court how they intended to proceed.

The joint submission states that the CFPB has indicated to the parties that it has not yet made a decision as to how it will proceed.  Because the case remains active, the CFPB cannot appeal Judge Preska’s decision to the Second Circuit unless she finds that there is no reason to delay that appeal under Rule 54(b) of the Federal Rules of Civil Procedure.

In their joint submission, the NYAG and RD Legal Funding ask the court to set a scheduling conference in September 2018 and describe their positions as follows:

NYAG.  The NYAG indicates that it wants the case to proceed as quickly as possible and would oppose any request by RD Legal Funding for delay, including a request for interlocutory appeal and a stay of the proceeding.  In anticipation of a filing by RD Legal Funding raising jurisdictional issues, the NYAG indicates its belief “that the Court is clear as to jurisdiction in its [June 18 order].”  The NYAG cites Judge Preska’s statements in her June 18 order that the NYAG has “independent authority to bring claims in federal district court under the CFPA, without regard to the constitutionality of the CFPB’s structure” and that “federal question subject matter jurisdiction over the CFPA claims exists regardless of the constitutionality of the CFPB’s structure.”  Also cited is her determination that the court had supplemental jurisdiction over the NYAG’s state law claims because they “arise out of the same common nucleus of operative fact” as the CFPA claims.

RD Legal Funding.   RD Legal Funding contends that the June 18 order “struck each substantive provision of the [CFPA] that forms the basis of federal jurisdiction, which RD Legal will address in a separate filing.”  It also asks the court “to resolve the immediate ambiguity in the CFPB’s position and to prevent potential duplicative proceedings” by first making an express finding that there is “no just reason for delay” and entering judgment against the CFPB only under Rule 54(b) of the Federal Rules of Civil Procedure and then, should the CFPB seek immediate review of the June 18 order, certifying the June 18 order for interlocutory appeal and staying the proceeding during the pendency of the appeal.  RD Legal Funding indicates that should the CFPB not seek immediate review “and the Court permits the NYAG to proceed with claims under the stricken Title X,” it is prepared to litigate in the district court although it “do[es] not believe that would serve the interests of judicial economy.”

We find Judge Preska’s opinion to be self-contradictory.  On the one hand, she denied a motion to dismiss the claims brought by the NYAG against RD Legal Funding.  One of those claims is a federal UDAAP claim brought under Section 1042 of Dodd-Frank.  Section 1042(a) states, in relevant part:

“[T]he attorney general … of any state may bring a civil action in the name of such state in any district court of the United States in that state … to enforce provisions of this title …”

In asserting a federal UDAAP claim under Section 1042, the NYAG relied on Dodd-Frank Section 1031(a) which authorizes the CFPB to “take any actions authorized under Subtitle E [which describes the enforcement powers of the CFPB] to prevent a covered person … from committing and engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”

On the other hand, toward the end of the opinion, Judge Preska dismissed the CFPB’s claims against RD Legal Funding and held that the entirety of Title X of Dodd-Frank is unconstitutional and should be stricken.  Title X, of course, includes Sections 1042 and 1031 of Dodd-Frank which are the sections relied upon by the NYAG.

Because of these contradictory rulings, Judge Preska will need to decide whether the NYAG’s claims remain alive.  We would expect Judge Preska to dismiss the NYAG’s Section 1042 claim since Section 1042 provides that a state attorney general opting to use Section 1042 must first consult with the CFPB about his or her intent to file a 1042 claim and that, while the CFPB may not preclude a state attorney general from filing such a lawsuit, the CFPB has the right to intervene in that lawsuit as a party.  This seems to demonstrate Congressional intent not to give a state attorney general the power to use Section 1042 if the CFPB lacks such power.

Judge Preska has already ruled that the CFPB lacks any power under Title X of Dodd-Frank because it was unconstitutionally structured.  If she dismisses the NYAG’s Section 1042 claim as we expect, the NYAG will need to determine whether it wants to appeal such ruling.  Because the NYAG’s state law claims remain viable, the NYAG could only appeal if Judge Preska gives the NYAG permission to file an interlocutory appeal and the Second Circuit agrees to hear the appeal.  If the NYAG decides not to appeal such a ruling, Judge Preska probably should dismiss the case in its entirety for lack of federal subject matter jurisdiction (unless the CFPB asks Judge Preska to enter a final judgment as to its claims so that the CFPB can appeal the constitutionality issue to the Second Circuit.)







A group of 21 state attorneys general have sent a letter to the Senate majority and minority leaders as well as to the chairman and ranking member of the Senate Banking Committee urging them to reject H.R. 3299 (“Protecting Consumers’ Access to Credit Act of 2017”) and H.R. 4439 (“Modernizing Credit Opportunities Act”).

H.R. 3299, known as the “Madden fix” bill, was passed by the House in February 2018.  It attempts to address the uncertainty created by the Second Circuit’s decision in Madden v. Midland Funding.  In that decision, the Second Circuit held that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act (NBA) allows the national bank to charge.  The bill would amend Section 85, as well as the provisions in the Home Owners’ Loan Act (HOLA), the Federal Credit Union Act, and the Federal Deposit Insurance Act (FDIA) that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks, to provide that a loan that is made at a valid interest rate remains valid with respect to such rate when the loan is subsequently transferred to a third party and can be enforced by such third party even if the rate would not be permitted under state law.

H.R. 4439 was referred to the House Financial Services Committee in November 2017.  It is intended to address a second source of uncertainty for some loans that are made by banks with substantial origination, marketing and/or servicing assistance from nonbank third parties and then sold shortly after origination.  These loans have been challenged by regulators and others on the theory that the nonbank agent is the “true lender,” and therefore the loan is subject to state licensing and usury laws.

The bill would amend the Bank Service Company Act to add language providing that the geographic location of a service provider for an insured depository institution “or the existence of an economic relationship between an insured depository institution and another person shall not affect the determination of the location of such institution under other applicable law.”  The bill would amend the HOLA to add similar language regarding service providers to and persons having economic relationships with federal savings associations.

It would also amend Section 85 of the NBA to add language providing that a loan or other debt is made by a national bank and subject to the bank’s rate exportation authority where the national bank “is the party to which the debt is owed according to the terms of the [loan or other debt], regardless of any later assignment.  The existence of a service or economic relationship between a [national bank] and another person shall not affect the application of [the national bank’s rate exportation authority] to the rate of interest rate upon the [loan, note or other evidence of debt] or the identity of the [national bank] as the lender under the agreement.”  The bill would add similar language to the provisions in the HOLA and FDIA that provide rate exportation authority to, respectively, federal savings associations and state-chartered banks.

The state AGs assert in their letter that the bills “would legitimize the efforts of some non-bank lenders to circumvent state usury law” and “would constitute a substantial expansion of the existing preemption of state usury laws.”  As support for their argument that Congress did not intend to allow nonbank entities to use NBA preemption, they cite to the OCC’s recent bulletin on small dollar lending in which the OCC stated that it “views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).”

While the context for the OCC’s statement was “specific to short-term, small-dollar installment lending,” we have expressed concern as to its implications for all banks that partner with third parties to make loans under Section 85.  As we noted, the statement also seems at odd with the broad view of federal preemption enunciated by the OCC with respect to the Madden decision.

While the enactment of legislation reaffirming the valid-when-made doctrine and addressing the “true lender” issue would be helpful, we have advocated for the OCC’s adoption of a rule providing that (1) loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the NBA for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.  In other words, it is the origination of the loan by a national bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.

In two enforcement actions pending in Colorado state court, the Administrator of the Uniform Consumer Credit Code for the State of Colorado is employing the “true lender” theory and the Second Circuit’s Madden decision to challenge two bank-model lending programs.


The New York Department of Financial Services (“NYDFS”) has adopted a regulation that requires “consumer credit reporting agencies” (“CCRAs”) to register with the NYDFS, prohibits CCRAs from engaging in certain practices, and requires CCRAs to comply with certain provisions of the NYDFS cybersecurity regulation.

The new regulation became effective upon the publication of a Notice of Adoption by the NYDFS in the State Register on July 3, 2018.  Its definitions of “consumer credit report”  and “consumer credit reporting agency” closely track the definitions of, respectively, the terms “consumer report” and “consumer reporting agency” in the FCRA.  However, the term “consumer credit report” is limited to “a consumer report…bearing on a consumer’s credit worthiness, credit standing, or credit capacity.”  Similarly, the term “consumer credit reporting agency” is limited to “a consumer reporting agency that regularly engages in the practice of assembling or evaluating and maintaining [information from furnishers] for the purpose of furnishing consumer credit reports to third parties.”  The term “New York consumer” is defined as “an individual who is a resident of New York State as reflected in the most recent information in the possession of a [CCRA].”

Registration.  A CCRA must register with the NYDFS if “within the previous 12-month period, [it] has assembled, evaluated, or maintained a consumer credit report on one thousand or more New York consumers.”  Every CCRA “that is required to register…at any time between June 1, 2018 and September 1, 2018” must register by September 15, 2018.  Registration must be renewed by February 1, 2019 for the 2019 calendar year and by February 1 of each year thereafter.

The regulation prohibits a CCRA that is required to be registered and has not done so from engaging in the business of a CCRA in New York by furnishing a consumer credit report on a New York consumer to any individual or entity.  It also prohibits any “regulated person” from paying “any fee or other compensation” or transmitting any information about a New York resident to a CCRA that is required to be registered and has not done so.  A “regulated person” is defined as “any person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law.”

Prohibited Practices.  A CCRA that is required to be registered is prohibited from engaging in various practices including engaging in any “unfair, deceptive, or predatory act or practice toward any consumer that is prohibited by any federal law, or by any New York State law that is not preempted by federal law,” or engaging in “any unfair, deceptive, or abusive act or practice in violation of section 1036 of the [Dodd-Frank Act].”

Cybersecurity.  A CCRA that is required to be registered must comply with specified provisions of the NYDFS cybersecurity regulation.  Except for the provisions that have a February 28, 2019 compliance date, a CCRA must comply with the specified provisions of the cybersecurity regulation by November 1, 2018.

On June 26, 2018, the Federal Trade Commission and New York Attorney General’s Office filed a lawsuit against a debt broker, debt collector and their principals to shut down a phantom debt collection scheme.  According to the complaint, debt broker Hylan Asset Management LLC and its owner, Andrew Shaevel, purchased, placed for collection, and sold phantom debts.  The complaint alleges that Hylan knew that the debts were fabricated because they were purchased from Hirsch Mohindra and Joel Tucker, two individuals who were previously sued by the FTC.  As a result of those actions, Mohindra was banned from the debt collection business and from selling debt portfolios and Tucker was banned from handling sensitive financial information about consumer debts.

The lawsuit also charges a debt collector, Worldwide Processing Group, LLC and its owner Frank Ungaro, Jr. for their role in collecting these phantom debts. The complaint alleges that Worldwide and Ungaro engaged in illegal collection practices and similarly knew that the debts were fabricated.

Hylan and Shaevel are charged with violating the FTC Act by marketing and distributing counterfeit and unauthorized debts.  Worldwide and Ungaro are charged with violating the FTC Act by making false or misleading representations that the consumers owe debts.  Worldwide and Ungaro are additionally charged with violating the Fair Debt Collection Practices Act by making false, deceptive, or misleading representations to consumers, engaging in unlawful communications with third parties, and failing to provide statutorily-required notices.

All of the defendants, including those individually named, are charged with violations of New York General Business Law § 349 by engaging in deceptive acts or practices in connection with conducting their debt sales and collection businesses, along with violations of New York State Debt Collection Law by engaging in prohibited debt collection practices under the statute, including, disclosing or threatening to disclose information affecting the debtor’s reputation for credit worthiness with knowledge or reason to know that the information is false and claiming, or attempting to enforce a right with knowledge or reason to know that the right does not exist.

This lawsuit is part of the FTC’s and State Attorneys General continuing efforts to crackdown on phantom debt schemes.

We have blogged twice (here and here) about the conclusion in RD Legal Funding that Title X of Dodd-Frank is unconstitutional because it provides that the sole director of the CFPB can be removed only for cause.  This post addresses the issue that took up 95 pages of the 101-page opinion—whether RD Legal Funding violated UDAAP and usury laws because purported asset purchases were in fact disguised loans.  Before enforcement authorities or plaintiffs’ attorneys get too excited that the court found against RD Legal Funding on this issue, the unusual facts of the case and the basis for the court’s opinion need to be examined.

RD Legal Funding purchased at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the NFL Concussion Litigation Settlement Agreement (the “NFLSA”) and the September 11th Victim Compensation Fund of 2001 (the “VCF”).  In both situations, the court indicated, consistent with the complaint, that the consumer’s right to a benefit and the amount of the benefit had been determined.  The party responsible for payment (the NFL or the U.S. Government) was unquestionably willing and able to make the required payment.  The only question was when payment would be made.  Of course, this scenario differs greatly from the typical situation where a litigation funding company purchases an interest in a claim in ongoing personal injury or other litigation. Indeed, an industry trade group, siding with the CFPB and NY AG against RD Legal Funding, made exactly this point:

The pre-settlement legal funding transactions referenced in ALFA’s amicus curiae brief differ in a crucial respect. (See ALFA Br.)   In those transactions, the pre-settlement legal funding agreements are entered into before the claim is resolved.  The ALFA Member’s right to repayment is contingent on the consumer’s ultimate success on his or her claim. (ALFA Br. 5.)

Opinion at p. 53.

For some reason, the CFPB and NY AG did not argue, and the court did not determine, that the payment of settlement benefits and subsequent payment to RD Legal Funding were assured and, hence, the advances functioned the same as loans.  Accordingly, and because the decision was on a motion to dismiss, where all factual allegations are required to be accepted as true, the RD Legal Funding decision did not address whether benefit payments were certain.

Rather, the decision was based on the court’s determination that the purported benefit assignments in question were void.  In the case of the NFLSA benefits, the underlying settlement agreement expressly provided that any “assignment, or attempt to assign … any rights or claims relating to the subject matter of the Class Action Complaint will be void, invalid, and of no force and effect.” (Opinion at 20).  As to the VCF benefits, the court pointed to three requirements under the federal Anti-Assignment Act, 31 U.S.C. § 3727, for the assignment of claims against the United States.  It then observed that “neither party has argued that the RD Entities complied with the Anti-Assignment Act’s three requirements under Section 3727(b).” (Opinion at 41).  (The court did not address why the assignments to RD Legal Funding could not function as valid assignments of the proceeds of VCF benefits and why such assignments could not be enforced against the VCF beneficiaries.)

After concluding that the assignments before it were void, the court leaped to the conclusion that, as a result, the transactions were necessarily disguised loans.  The basis for this conclusion was never articulated by the court.  Just because the underlying transactions are problematic does not mean that they meet the New York definition of usurious loans.

Remarkably, the decision never addressed the New York (or any other) definition of the term “loan.” It ignored that, for over 150 years, New York courts have declared that “there can be no usury unless the principal sum advanced is repayable absolutely.” Pomeroy v. Ainsworth, 22 Barb. 118 (1856).  Even the NY AG has recognized this principle.  In a February 2005 press release regarding litigation financing reforms, the Attorney General stated:

The cash advances provided by these firms are not considered “loans” under New York State law because there is no absolute obligation by a consumer to repay them. The contracts provide that, in the event the consumer receives no recovery from his or her claim, the consumer owes no money to the cash advance firm.

Maybe in the instant case, if it had confronted the issue, the court would have concluded that the assignments provided the requisite certainty of payment.  In most other cases, however, this certainty will be lacking.

But even putting aside this glaring omission, it is clear that the decision applies to a narrow range of transactions, where the assignments of the underlying claims are void for some reason.  That is not the case when the anticipated proceeds of lawsuit claims are sold on a non-recourse basis.  See Williams v. Ingersoll, 89 N.Y. 508, 518-521 (1882). (binding authority in New York holding that the proceeds of personal injury claims may be assigned).  Critically, “[i]f the assignments are valid … the entire basis of the Government’s jurisdictional theory under the CFPA [that the transactions are loans’ would fall apart.”  (Opinion at 19).

In two closely-watched enforcement actions pending in Colorado state court, the Administrator of the Uniform Consumer Credit Code for the State of Colorado is employing the “true lender” theory and the Second Circuit’s decision in Madden v. Midland Funding, LLC to challenge two bank-model lending programs.  Specifically, the Administrator asserts that the origination of the loans by state-chartered banks should be disregarded under the “predominant economic interest” test employed by some district courts in true lender cases, and that the banks’ power to export interest rates under federal law does not follow loans they assign to their program partners.  For these reasons, the Administrator contends that the loans are subject to Colorado usury laws despite the fact that state interest rate limits on state bank loans are preempted by Section 27 of the Federal Deposit Insurance Act (FDIA).

Although these cases were filed in January 2017, little has happened on the merits to date.  The cases were removed to federal court by the program sponsors and remanded a year later.  The banks involved in the programs filed separate declaratory relief actions in federal court, but those cases were dismissed without prejudice on abstention grounds.  The banks then filed motions to intervene in the state court actions, and the program sponsors moved to dismiss the state court cases.  The motions to dismiss argue that the usury claims are preempted by the FDIA, that Madden was wrongly decided and should not be followed, and that the banks are the “true lenders” as a matter of federal law, and also under state law if it applies.

On June 22, 2018, the state court heard oral argument on the motions to dismiss and to intervene in both cases.  The Court allowed argument for nearly two hours, and provided no clear indication on how it would rule before taking the motions under submission.  We will continue to follow the cases closely and report on additional developments.





An Executive Order issued by Washington Governor Jay Inslee on June 12, 2018 seeks to rebuff the U.S. Supreme Court’s ruling in Epic Systems LLC v. Lewis, 138 S. Ct. 1612 (May 21, 2018), by implementing new state procurement procedures that overtly discriminate against companies whose employment agreements contain arbitration provisions with class action waivers.  However, the Executive Order may be preempted by federal law.

Epic Systems held that class action waivers in employment arbitration agreements are valid and enforceable under the Federal Arbitration Act (FAA) and are not prohibited by the National Labor Relations Act.  Nevertheless, the Executive Order requires Washington State executive and cabinet agencies to “seek to contract with qualified entities and business owners that can demonstrate or will certify that their employees are not required to sign, as a condition of employment, mandatory individual arbitration clauses and class or collective action waivers.”

The preamble to the Executive Order makes clear that it is specifically targeted to avoid the application of Epic Systems.  It states that the “decision [Epic Systems] will inevitably result in an increased difficulty in holding employers accountable for widespread practices that harm workers,” that “collective power is a real force for change, as evidenced by the ‘Me Too’ movement” and, therefore, “it is incumbent on state agencies to make every effort to encourage and support employers who demonstrate that they value workers’ rights to collectively address workplace disputes.”  A statement by the Governor’s Office confirmed that the Executive Order is predicated on public policy considerations that are antithetical to Epic Systems:

In our state, we value companies that respect workers’ rights …. There is power in numbers.  There is power in transparency.  And there is power in our pocketbook to influence companies to do the right thing.  We can’t change the Supreme Court’s ruling but we can change how we do business.

The Executive Order states that it is effective “[t]o the extent permissible under state and federal law.”  Because the FAA preempts inconsistent state laws, the Executive Order may be preempted by federal law.  The FAA requires rigorous enforcement of arbitration agreements “‘according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.’”  Epic Systems, 138 S. Ct. at 1621, quoting American Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 233 (2013).  As the Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 344  (2011):

States [cannot take steps that] … conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms …. States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons ….

The Executive Order is arguably preempted by federal law because it harnesses the economic power of Washington State to discriminate against companies that desire to enter into employment contracts containing arbitration agreements with class action waivers that the Epic Systems Court expressly declared to be lawful and enforceable in an opinion that is the law of the land.  Under substantive federal policy embodied in the FAA, states are forbidden from discriminating against arbitration or singling out arbitration agreements for special treatment.   See, e.g., Doctors’ Assoc., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).  That could be the Achilles’ heel of the Executive Order, since it blatantly discriminates against certain companies based solely on the fact that their employment contracts contain arbitration agreements specifying “with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.”  In any event, we consider the Executive Order to be misguided since arbitration is more beneficial to individual employees than class action litigation.