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In the closely watched case of Madden v. Midland Funding, LLC, on which we have reported here and here, the US Second Circuit Court of Appeals ruled that federal preemption principles generally applicable to national banks under the National Bank Act did not extend to nonbank assignees of a bank loan where the bank no longer held an interest in the loan, and federal law therefore did not preempt New York state usury limitations. In turn, the Second Circuit declined to rehear the case, and the US Supreme Court declined to grant certiorari to review the case.

In its decision, the Second Circuit remanded the case to the US District Court for the Southern District of New York for the resolution of remaining state law questions, including whether Delaware law (which has no usury limitations) governed the account agreement. On February 27, 2017, the district court issued an opinion addressing these issues in response to the defendants’ motion for summary judgment and the plaintiff’s motion for class certification.

In a significant decision, on August 31, the US District Court for the Central District of California held that a tribal bank originating loans for a non-bank lender was not the “true lender”—making the loans subject to state usury limits.

Background

In December 2013, the Consumer Financial Protection Bureau (CFPB) commenced litigation against CashCall (a payday lender in a partnership with a tribal bank) and other defendants, claiming that they had violated the federal law prohibition on unfair, deceptive, or abusive acts or practices (UDAAP) for financial services providers by servicing and collecting on loans that were wholly or partially void or uncollectible under state law.

The Consumer Financial Protection Bureau (CFPB) has taken two notable steps that signal a new interest in regulating marketplace, or “peer-to-peer,” lending. The CFPB announced that it will expand its consumer complaint portal to accept complaints about marketplace lenders. Simultaneously, the CFPB released a consumer bulletin containing information and tips for consumers considering taking out a loan with a marketplace lender.

Marketplace lending now joins mortgages, student loans, auto loans or leases, payday loans, bank accounts and services, credit cards, prepaid cards, credit reporting, debt collection, money transfer or virtual currency, and payday loans as categories of financial services for which the CFPB accepts complaints. The consumer complaint portal has been and continues to be controversial in the financial services industry. The complaints are publicly available and not vetted or filtered by the CFPB for accuracy or veracity, although it scrubs personal information from the narrative and takes steps to confirm a commercial relationship between a consumer and a company. The financial services provider receiving a complaint is expected to submit an answer within 15 days if possible, and no later than 60 days.

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.

In the spirit of the new year, we decided to take our Ouija board out of the attic and venture a few predictions for 2016 in financial services regulation. The financial regulatory agencies have been relatively quiet for the last few weeks, but we expect to see significant regulatory activity in 2016. So, we have consulted the spirit of FinReg Nostradamus and assembled a list of some of the regulatory actions that we expect to see this year.

  • Incentive Compensation Rules: The financial agencies’ 2011 proposed rules regarding incentive compensation were never finalized, and the agencies are reportedly engaged in discussions regarding the framework of the incentive compensation rules and intend to release a new proposed rule this year. Key issues that the new proposed rule will likely address include triggers for required clawback of compensation and the scope of clawback powers, mandatory compensation deferral requirements and time periods, and application of the rules to alternative compensation arrangements, such as carried interest.
  • Net Stable Funding Ratio: Although the Basel Committee on Banking Supervision (Basel Committee) finalized the net stable funding ratio (NSFR) standards of Basel III at the end of 2014, proposed regulations that implement the NSFR have yet to be issued by the US federal banking agencies. The agencies and industry representatives have been engaged in ongoing discussions with respect to the NSFR regulations. Considering the NSFR standards are required under Basel III to be fully implemented by January 2018, barring any unexpected delays, we should see proposed NSFR regulations in the first half of 2016.
  • Consumer Financial Protection Bureau (CFPB): A number of rulemakings from the CFPB are expected this year, including long-awaited rulemakings on debt collection and prepaid accounts. We also expect proposed rules on mortgage servicing and on short-term lending (e.g., payday and auto title loans) based on the framework that the CFPB released in 2015. Also on the CFPB’s regulatory agenda for 2016 are mandatory arbitration clauses, checking account overdraft programs, and larger participants in the consumer installment loan and title loan markets.

The California Department of Business Oversight (DBO) has launched an inquiry into the increasingly popular marketplace lending industry. The stated purpose of the inquiry is “to assess the effectiveness and proper scope of [the DBO’s] licensing and regulatory structure as it relates to [marketplace] lenders.”

The DBO sent its online survey to 14 marketplace lenders and requested a variety of information, including the volume of business, types of loans, APR, delinquency rates, and investor funding or sale data. The survey requests data from January 1, 2010 through June 30, 2015. Responses to the survey are due by March 9, 2016. Although the DBO has not identified the 14 marketplace lenders that received the survey, reports confirm that the inquiry includes both consumer lenders and commercial and small business lenders.

The DBO’s inquiry follows the Department of the Treasury’s request for information earlier this year seeking public comments on marketplace lending. Given the growing popularity of marketplace lending platforms among consumers and small businesses, further regulatory interest and possible future regulatory action are likely.