On January 3, 2017, the U.S. District Court for the Central District of California certified for appellate review its August 31, 2016 Order finding that a California-based payday lending company used a “rent-a-tribe” scheme to avoid state usury laws, in violation of the Consumer Financial Protection Act (CFPA). Enforcement Watch covered the August 31, 2016 Order in this post.
According to the Consumer Financial Protection Bureau (CFPB), the company entered into a lending agreement with a tribal entity owned by a member of a Native American Indian Reservation. Under the terms of the agreement, the tribal entity originated consumer installment loans (typically payday loans) and then immediately sold the loans to an entity controlled by the company. The loan amounts ranged from $850 to $10,000, and included large upfront fees, annual percentage rates that in some cases were higher than 340%, and extended repayment terms. The company and its affiliates allegedly funded all the loans, indemnified the tribal entity for any liability related to the loans, underwrote the loans, and provided customer service, collection, and marketing services. The company claimed it could operate without a state license and originate loans that did not comply with state usury laws because the tribal entity had originated the loans.
In its August 31 Order, the Court found that the company was the “true lender” of the loans, and thus originated loans with interest rates that violated state usury laws and charged illegal up-front fees that violated the Consumer Financial Protection Act. The Court held the loan contracts’ choice-of-law provision, which required application of tribal law that permitted such loans, was unenforceable because the tribal entity was not the true lender. The trial on damages was initially scheduled for early February 2017.
On December 5, 2016, the company filed a motion for interlocutory appellate review, and the Court granted the company’s motion on January 3, 2017, adopting the company’s proposed statement of decision in its entirety. The Court held that four questions of law merited appellate review: (1) whether an individual can be held liable for a corporation’s attempts to collect unenforceable loans, particularly in cases where the individual received legal advice that the interest rates were legal; (2) whether the CFPB’s structure is unconstitutional, and the effect of such a ruling on current CFPB enforcement actions; (3) whether a CFPA violation can be predicated on violations of state law; and (4) the proper test for determining the “true lender” on a loan, particularly whether such a test permits the district court to look past the express terms of the loan contracts.
As to the constitutionality of the CFPB’s structure, the Court recognized that the D.C. Circuit’s opinion in PHH Corp. v. CFPB provided a remedy for the CFPB’s unconstitutional structure that permitted the CFPB’s enforcement actions to continue. The Court found, however, that reasonable jurists might differ on the applicable remedy for the CFPB’s unconstitutional structure, and that the remedy could require dismissal of all pending enforcement actions. Thus, the constitutionality of the CFPB’s structure, and the authority of the CFPB to continue pursuing enforcement actions in light of its alleged unconstitutional structure, will be reviewed by the Ninth Circuit. The PHH Corp. decision is currently pending en banc review before the D.C. Circuit.
The Court also noted there is a circuit split among the federal courts of appeals on the issue of whether violations of federal statutory law, such as the CFPA or the Federal Debt Collections Practices Act, can be predicated solely on violations of state law. The Court noted that the Ninth Circuit has yet to address the issue.
Having found that the company met its burden for seeking intermediate appellate review, the Court turned to the question of whether the litigation in the district court should be stayed pending such review. The Court granted the company’s request for a stay, reasoning that the CFPB “seeks an award of hundreds of millions of dollars in penalties and/or restitution based on numerous novel or disputed legal theories,” and that denial of a stay pending appeal would “effectively negate the usefulness of interlocutory appeal.”
Enforcement Watch will continue to cover developments in this case. In addition to covering the Court’s August 31, 2016 Order, Enforcement Watch has covered similar enforcement actions against the company by state attorney generals, which are available here, here, here, and here. And Mike Whalen, co-leader of Goodwin’s Fintech’s practice has covered true lender issues as part of Goodwin’s Fintech Flash series.