The parties in Madden v. Midland Funding, LLC. have filed a joint motion with the New York federal district court seeking preliminary approval of a class settlement.

The plaintiffs’ class action complaint in Madden alleged that a debt buyer, which had purchased the plaintiffs’ charged-off credit card debt from a national bank, violated the Fair Debt Collection Practices Act (FDCPA) by falsely representing the amount of interest it was entitled to collect.  The complaint also alleged violations of New York usury law.  In an unexpected outcome, the Second Circuit held that the purchaser of charged-off debt from a national bank does not inherit the preemptive interest rate authority of the national bank under Section 85 of the National Bank Act (NBA).  Accordingly, the debt buyer could be subject to the usury limitations provided by state law.  In June 2016, the U.S. Supreme Court denied the defendants’ petition for certiorari.

The proposed Settlement Class would be defined as:

All persons residing in New York who were sent a letter by Defendants attempting to collect interest in excess of 25% per annum regarding debts incurred for personal, family, or household purposes, whose cardholder agreements: (i) purport to be governed by the law of a state that, like Delaware’s, provides no usury cap; or (ii) select no law other than New York.  This class comprises two subclasses [with one subclass for claims arising out of New York usury law violations during a specified period and the other subclass for claims arising out of FDCPA violations during a specified period.]

The settlement provides for three main forms of relief:

  • $555,000 in monetary relief
  • $9,250,000 in balance reduction relief/credits
  • Ongoing compliance of defendants’ policies and practices with applicable law regarding collection of interest on settlement class member accounts

We continue to urge the OCC to confront true lender and Madden risks directly.  This could (and should) be accomplished through adoption of a rule: (1) providing that loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act 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.  (The rule should apply in the same way to federal savings banks and their governing statute, the Home Owners’ Loan Act.)  In other words, it is the origination of the loan by a supervised 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.

 

On January 23, Delaware Governor John Carney signed the “Delaware Federal Employees Civil Relief Act” into law.  The Act states that its purpose “is to provide for the temporary suspension of judicial and administrative proceedings in Delaware that may adversely affect the civil rights of Federal workers during a shutdown.”  The Act provides for enforcement by the Delaware Attorney General and a civil penalty of up to $10,000 per violation, with that amount to be assessed daily for willful violations.

The Act defines a “Federal worker” as “an employee of a Federal government agency who resides in the State of Delaware and includes an employee of a contractor.”  The term “covered period” is defined as “the period beginning on the date on which a shutdown begins and ending on the date that is 30 days after the date on which that shutdown ends.”

Court-ordered stay.  The Act provides that a Federal worker who is furloughed or required to work without pay during a shutdown “may apply to a court for a temporary stay, postponement, or suspension regarding any payment of rent, mortgage, tax, fine, penalty, insurance premium, judgment, or other civil obligation or liability that the Federal worker owes or would owe during the duration of the shutdown.”  A Delaware “court” (as defined in the Act)  is authorized to grant such relief if it finds “that the ability of the Federal worker to pay such obligation has been materially affected by the shutdown.”  A stay can be ordered for the “covered period and 90 days thereafter, or for any part of that period” and a court “may set the terms and amounts for such installment payments as is considered reasonable by the court.”

Protection from eviction, insurance termination. The Act prohibits evictions from residential property during a covered period for nonpayment of rent without a court order.  An eviction can be stayed for a period of 30 days if the court finds the Federal worker’s ability to comply with the lease has been materially affected by the shutdown and the stay can be extended for reasons of justice and equity.  In addition, without a court order, a “covered insurance policy” cannot “lapse, terminate or be forfeited because a Federal worker does not pay a premium or interest or indebtedness on a premium under a policy that is due during a covered period.”

6% interest rate limit. The Act provides that “an obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a Federal worker, or a Federal worker and the Federal worker’s spouse jointly, before the shutdown shall not bear interest in excess of 6 percent.”  If the debt is “a mortgage, trust deed, or other security in the nature of a mortgage,” the 6% rate limit applies “during the covered period and 90 days thereafter,” meaning until 120 days after the shutdown ends.  For any other debts, the 6% limit applies only during the covered period, meaning until 30 days after the date the shutdown ends.  For purposes of the 6% limit, the Act provides that “interest” includes “service charges, renewal charges, fees, or any other charges, except bona fide insurance, with respect to an obligation or liability.”

Any interest in excess of 6% that cannot be charged because of the Act “is forgiven” and the amount of a periodic payment “shall be reduced by the amount of the interest forgiven…that is allocable to the period for which such payment is made.”  A creditor can obtain court relief from the Act’s interest rate limitation if, in the court’s opinion, the Federal worker’s ability to pay more than 6% interest “is not materially affected by reason of the shutdown.”

The Act’s 6% interest rate limit is not self-executing.  To receive the benefit of the limit, the Federal worker must “provide to the creditor written notice that the Federal worker is furloughed or not getting paid as a result of the shutdown not later than 90 days after the date that the shutdown began.”

The most recent federal shutdown began on December 22 and ended on January 25.  Since the Act became effective when it was signed by Governor Carney on January 23, a Federal worker would have until approximately mid-March 2019 to provide notice to a creditor to obtain an interest rate reduction.  For mortgage debts, a Federal worker would be eligible to have his or her interest rate reduced to 6% for the period of December 22 until 120 days after January 25.  For other debts, the period of the reduction would be December 22 until 30 days after January 25.

Issues. We are hopeful that Delaware’s Attorney General or Department of Banking will issue guidance on the Act.  Among the many concerns and issues it raises are:

  • Because it requires creditors to forgive contracted for interest, the Act might be vulnerable to a constitutional challenge as a violation of the U.S. Constitution’s provision prohibiting a state from passing any law “impairing the Obligation of Contracts.”
  • While the Act does not include a private right of action and provides for enforcement only by the Delaware Attorney General, it appears a Federal worker would be entitled to the rights and remedies provided to borrowers under Delaware’s general usury law.  Under that law, a Federal worker could withhold payment of any “interest” greater than 6% (and assert usury as a defense in an action to collect the excess “interest”) or, if the debt has been fully repaid with interest at rate greater than 6%, bring an action to recover the greater of 3 times the excess interest paid or $500.  (Since a creditor is likely to assert that the fact that a Federal worker who paid off a debt at the full interest rate has demonstrated that the worker’s ability to pay the full amount of interest was not “materially affected by the shutdown,” the effectiveness of a private usury action as a remedy is questionable.)
  • The Act’s 6% interest rate limit is not restricted to consumer purpose debts.
  • The Act would appear to be preempted as to out-of-state banks that rely on federal preemption to charge Delaware residents an interest rate permitted by their home states that is greater than 6%.
  • Since the Act is modeled on the federal Servicemembers Civil Relief Act (SCRA), we would expect that creditors can comply with the interest rate reduction required by the Act by using the same calculation methods that they are using for SCRA compliance.
  • The extent to which the Act’s protections extend to Federal workers who are guarantors of debts owed by non-Federal workers is unclear.
  • The term “court” is used throughout the statute as the source for redress for the Federal worker or Attorney General, such as to obtain stays and orders of court.  However “Court” is defined in the Act to mean “any court or administrative agency of the State, or a subdivision thereof, whether or not a court or administrative agency of record.”  It is unclear how courts or administrative agencies which do not ordinarily have power to, for example, issue injunctive relief could be included under such definition, given how the term is used in the Act.  Further, the enforcement section provides that a finding of a “court or tribunal of competent jurisdiction” is necessary to recover the fines noted above, but the Act does not clarify what “tribunal” may refer to apart from the already broadly defined “court.”

 

 

 

The CFPB announced that it has entered a settlement with Mark Corbett to resolve the Bureau’s allegations that Mr. Corbett violated the Consumer Financial Protection Act in connection with his brokering of contracts providing for the assignment of veterans’ pension payments to investors in exchange for lump sum amounts.  In its press release announcing the settlement, the Bureau stated that its investigation “is being conducted in partnership with the Office of Arkansas Attorney General Leslie Rutledge and the South Carolina Department of Consumer Affairs.”

The findings and conclusions set forth in the consent order state that the following conduct by Mr. Corbett constituted unfair and deceptive acts or practices in violation of the CFPA:

  • Misrepresenting that the transactions were valid and enforceable when they were in fact void because federal law prohibits agreements under which another person assigns the right to receive a veteran’s pension payments and failing to disclose to consumers that the transactions were illegal because of such federal law prohibition
  • Misrepresenting to consumers that the transactions were sales “and not high-interest credit offers”
  • Misrepresenting to consumers the date by which they would receive funds from investors
  • Failing to inform consumers of the interest rates charged on the transactions

The consent order permanently bans Mr. Corbett from brokering, offering, or arranging agreements between veterans and third parties under which the veteran purports to sell a future right to an income stream from the veteran’s pension or assisting others in engaging in such conduct.  Due to his inability to pay, the consent order imposes a civil money penalty of $1.

The CFPB does not articulate the basis for its legal conclusion that the transactions were loans rather than sales and does not identify the states whose laws were purportedly violated.  Perhaps its conclusion rests on the premise that the veterans had an absolute obligation to repay the lump sum amounts, a feature that state law might use to define a loan.  In this regard, we note that the Bureau alleged that the veterans, in exchange for lump sum amounts paid by the investors, “are thereafter obligated to repay a much larger amount by assigning to investors all or part of their monthly pensions or disability payments” and that the veterans “were required to purchase life insurance policies so that, should a veteran die and the income stream stop, the outstanding amount on the contract would still be paid.”

Alternatively, the CFPB might have based its conclusion on the alleged invalidity of the assignments.  This was the principal (if not only) argument for why an assignment of settlement benefits should be recharacterized as a loan that the New York AG and the Bureau successfully asserted in a lawsuit filed against RD Legal Funding under former Director Cordray’s leadership and now on appeal to the Second Circuit.  While the district court’s ruling that the CFPB’s structure is unconstitutional has garnered the most attention, the underlying allegation in the lawsuit, and the principal issue addressed in the district court’s opinion, was a claim that RD Legal’s litigation settlement advance product is a disguised usurious loan that is deceptively marketed and abusive.  In particular, the complaint alleged that the transactions were falsely marketed as assignments rather than loans, violated New York usury laws, and could not be assignments because the underlying settlements and/or applicable law expressly prohibited assignment of claimant recoveries.

For some reason, the CFPB and NY AG did not argue in RD Legal Funding, and the court did not determine, that the transactions were loans because payment of settlement benefits to RD Legal was assured.  Rather, the decision was based on the district court’s conclusion that the benefit assignments were void and as a result, the transactions were necessarily disguised loans.  As we observed, the basis for the conclusion that an invalid assignment of assets is necessarily a loan is untethered to the New York definition of usurious loans.

Under former Director Cordray’s leadership, the CFPB also took action against structured settlement and pension advance companies.  The first CFPB enforcement action under former Acting Director Mulvaney’s leadership was also filed against a pension advance company and alleged that the company made predatory loans to consumers that were falsely marketed as asset purchases.  The new consent order indicates that finance companies whose products are structured as purchases rather than loans remain a CFPB focus.  It is 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.)

 

A coalition of 14 state Attorneys General and the D.C. Attorney General have filed an amicus brief with the U.S. Court of Appeals for the Fourth Circuit in Williams v. Big Picture Loans in which a tribal lender and its tribal service provider have appealed from the district court’s denial of their motion to dismiss the complaint filed by consumers who alleged that the interest rate charged by the lender violated Virginia law.

The defendants argued that the complaint should be dismissed because, as “arms of the tribe,” the lawsuit was barred by sovereign immunity.   In denying the motion to dismiss, the district court ruled that the defendants had the burden of proving that they were shielded by sovereign immunity and had not met that burden.

In their amicus brief, the Attorneys General argue that the district court correctly placed on the defendants the burden of providing their entitlement to sovereign immunity (rather than on the plaintiffs to negate a claim of sovereign immunity).  They also argue that in determining whether the defendants acted as “arms of the tribe,” it was proper for the district court to look beyond the defendants’ official actions (meaning their legal or organizational relationship to the tribe) and consider their practical operation in relation to the tribe.

 

Virginia’s Attorney General has announced that “he has secured more than $50 million in debt relief and ordered civil penalties” as a result of his lawsuit filed in state court in March 2018 against Future Income Payments, LLC; FIP, LLC; and their individual owner for allegedly making loans to Virginia consumers, many of whom were military veterans, that were falsely marketed as asset purchases.  As discussed below, the court’s order is a default judgment in favor of the Virginia AG.

Although the AG’s complaint alleged that the interest rates charged on the transactions exceeded Virginia’s usury limits, it did not charge the defendants with violating the state’s usury laws.  Instead, the complaint charged the companies’ with violating the Virginia Consumer Protection Act (VCPA) based on their alleged misrepresentations to consumers and sought to hold the individual defendant personally liable for the companies’ VCPA violations based on his active participation in their business activities.  (The complaint alleged that the affected consumers could have brought private actions under Virginia’s usury laws but that the defendants avoided such potential actions by misrepresenting its transactions as “sales.”)

In September 2018, the CFPB filed a lawsuit against the defendants in a California federal district court in which it alleged that defendants made loans disguised as asset purchases that violated state usury and licensing laws.  More specifically, the CFPB alleged that the defendants had committed deceptive acts in violation of the Consumer Financial Protection Act and failed to make disclosures required by the Truth in Lending Act.  The CFPB also alleged that numerous state and local regulators and agencies, including the Virginia AG, had concluded that the defendants’ transactions were loans for purposes of applicable state laws.  The defendants have not yet filed an answer to the CFPB’s complaint or otherwise responded.

While the CFPB’s complaint provided no explanation for why the defendants’ transactions are in fact extensions of credit, the Virginia AG’s complaint alleged that although the defendants’ agreements had some variations, they have “always been virtually guaranteed repayment by Virginia pensioners, or [the defendants] built-in potential events that would discharge the pensioners’ obligations to repay, knowing those events were unlikely to occur.”

The Virginia court’s docket indicates that the defendants’ counsel withdrew from the case on May 30, 2018 following their filing of a motion to dismiss.  Based on a July 23, 2018 Wall Street Journal article that referred to the individual defendant as a “felon,” the defendant companies have been shut down and investors in the companies are expected to bring lawsuits against the individual defendant.  On September 11, 2018, the court denied the motion to dismiss and ordered the defendants to answer the complaint.

On November 14, the court entered a Permanent Injunction and Final Judgment that provided the defendants were in default due to their failure to answer the complaint.  The Permanent Injunction and Final Judgment includes a finding that the defendants’ transactions were loans disguised as sales and a declaration that the transactions were usurious to the extent they were made at rates exceeding 12% per annum.  However, the Virginia AG’s recharacterization of the transactions as loans was not litigated because the factual allegations against the defendants are deemed admitted for purposes of a default judgment.

The Permanent Injunction and Final Judgment also awards the following relief to the Virginia AG:

  • A civil penalty of $31,740,000
  • A permanent injunction barring the defendants from collecting usurious interest in the amount of $20,098,159.63
  • Restitution to consumers for losses in the amount of $414,473.72
  • Costs and attorneys’ fees in the amount of $198,000
  • A permanent injunction barring the defendants from violating the VCPA

 

 

Resolving an ambiguity in the California Finance Lender’s Law (CFLL), the California Supreme Court unanimously held that borrowers may use the unconscionability doctrine to challenge the interest rate on consumer loans of $2,500 or more, despite the fact that the CFLL has deregulated interest rates on such loans.  Although unconscionability claims of this nature will be difficult to prosecute, the decision creates heightened risk for nonbank consumer lenders doing business in California, particularly when lending at high rates.  Furthermore, because the decision could be followed in other states or applied in other contexts, such as small business lending, it also could impact loans made under other statutes that have deregulated interest rates, as opposed to statutes that affirmatively authorize interest rates established by contract.

In addition to copycat lawsuits by private plaintiffs alleging their interest rates are unconscionable, high-rate lenders could even face enforcement actions challenging their rates.  In California, it is possible that the state’s Attorney General, local prosecutors, or the California Department of Business Oversight (which has regulatory and supervisory jurisdiction over CFLL licensees) will pile on.

On October 16, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The Sky is Not The Limit: California Supreme Court Re-Regulates Deregulated Interest Rates.”  The webinar registration form is available here.

See our legal alert for a fuller discussion of the California Supreme Court’s decision.

 

 

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.

 

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.

 

 

 

 

By a vote of 245-171, the House passed H.R. 3299, the “Madden fix” bill (whose official title is the “Protecting Consumers’ Access to Credit Act of 2017.”)  In Madden, the Second Circuit ruled 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.

The bill would add the following language to Section 85 of the National Bank Act: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”

The bill would add the same language (with the word “section” changed to “subsection” when appropriate) to the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal and state savings associations, federal credit unions, and state-chartered banks.  (A Senate bill with identical language was introduced in July 2017 by Democratic Senator Mark Warner.)

The House passed the bill despite strong Democratic opposition, with only 16 Democrats voting for the bill and 170 voting against.  As a result, the bill is expected to face an uphill battle in the Senate even though it can be passed with only 60 votes.

While adoption of a “Madden fix” would eliminate the uncertainties created by the Second Circuit’s Madden decision, it would not address a second source of uncertainty for some loans that are made by banks with substantial marketing and 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 marketing and servicing agent is the “true lender,” and therefore the loan is subject to state licensing and usury laws.  In November 2017, a bipartisan group of five House members introduced a bill (H.R. 4439) that is intended to address the “true lender” issue.