A recent decision from the US District Court for the Eastern District of Pennsylvania, Kane v. Think Finance, Inc., Civ. No. 14-cv-7139, 2016 WL 183289 (E.D. Pa. 2016), has received a good deal of attention. Although it arises in the context of a payday lender, some market participants have questioned whether the decision is applicable to marketplace lending and other similar financial structures. Marketplace lending involves online platform operators, usually nonbank entities, that partner with a state or national bank, which in turn originates the loans to consumers. After a short holding period, the loans are then sold by the bank to the platform operator, which will subsequently sell the loans to third-party purchasers while retaining servicing responsibilities. Under these facts, the consensus is that such loans should be considered exempt from usury laws in states other than the state where the originating bank is organized due to principles of federal preemption that apply to state usury limits.
The Think Finance case stems from a number of actions filed against Think Finance, Inc. (Think Finance), a payday lender, by the Pennsylvania Office of the Attorney General (OAG). The OAG alleges that Think Finance was the de facto lender for a series of loans made through 2012 in a partnership with the now dissolved First Bank of Delaware and that the loans had interest rates (in the 200% to 300% range) that were usurious under Pennsylvania law. The OAG calls the arrangement with First Bank of Delaware a “scheme to avoid state usury laws” and an impermissible “rent-a-charter” arrangement. In ruling on a motion to dismiss filed by Think Finance, the district court held that federal preemption did not apply to the causes of action against Think Finance arising out of its lending activity because there were no claims against a bank. Therefore, the court allowed the claims against Think Finance regarding whether the loans were usurious under Pennsylvania law to proceed.
There are a few important issues to keep in mind about the Think Finance case:
- The district court was ruling on a motion to dismiss, so it had to assume as true any well-pled facts by the OAG. Think Finance asserted that the OAG’s allegations were conclusory and not well-pled, but the court did not accept that argument. Importantly, the district court did not make any finding that Think Finance was the de facto lender, but rather accepted as true that it was the de facto lender and that First Bank of Delaware was only a “nominal” lender.
- Think Finance is factually distinguishable from cases such as Madden v. Midland in the US Court of Appeals for the Second Circuit. In Madden, there was never an issue about whether a bank was the originator of the credit card debt. The issue in Madden was whether a nonbank assignee could enforce an interest rate that was potentially usurious under state law but could be validly enforced by a bank, had the bank retained ownership.
- The OAG also alleged violations of Pennsylvania’s Racketeer Influenced and Corrupt Organizations Act (RICO) law, because Pennsylvania law defines “racketeering activity” as including “[t]he collection of any money . . . in full or partial satisfaction of a debt which arose as the result of the lending of money or other property at a rate of interest exceeding 25% per annum . . . where not otherwise authorized by law.” We are not aware of RICO claims having been raised in prior “true lender” or “rent-a-charter” cases.
- On their motion to dismiss, the Think Finance defendants urged dismissal of the Pennsylvania RICO claims on several grounds, including that the loans were “authorized by law.” The court declined to dismiss the claims, concluding that the allegations that Think Finance was the de facto lender and did not qualify as a “foreign financial institution” under Pennsylvania law were sufficient to suggest that the loans may not be authorized by law.
Although the Think Finance case is in its early stages, the decision on the motion to dismiss requires participants in the marketplace lending space to consider the case’s potential future effect on loans with borrowers in Pennsylvania. In the meantime, this case is certainly one to watch as it proceeds.