LawFlash

CFPB, State Regulator Partner in Loan Broker Suit

October 04, 2019

The Consumer Financial Protection Bureau (CFPB) recently announced that, along with the South Carolina Department of Consumer Affairs, it has filed suit in South Carolina federal district court against two loan broker companies and their common owner/operator individually (the Defendants). According to the complaint, the Defendants took part in an alleged pension-assignment scheme that involved illegally exchanging veterans’ pensions for high-interest cash advances after extracting substantial commissions from pensioners (on the order of approximately 40% of the loan amount). Notably, this suit follows two related CFPB settlements[1] with loan brokers involved in a similar scheme.

The complaint alleged that the individual Defendant and her companies “broker[ed] contracts offering high-interest credit to consumers. . . . marketed as purchases of consumers’ future pension or disability payments.” Defendants then allegedly “set up contracts between consumers and investors where consumers receive a lump-sum payment, ranging from a few thousand to tens of thousands of dollars, and are thereafter obligated to repay a much larger amount by purportedly assigning to investors part of consumers’ monthly pension or disability payments.” The consumers’ obligations typically lasted five to ten years. The complaint alleges that a majority of the high-interest credit offers Defendants brokered were to veterans using their military or disability pensions as security for the loans.

As a matter of public policy, assignment of federal pension funds to a third party is generally prohibited under federal law.[2] Similarly, South Carolina law, which governs the contracts at issue in the suit, prohibits sales of unpaid earnings and also assignments of pensions as security on payment of a debt.[3] Accordingly, under both federal and state law, the complaint alleges, the loan contracts at issue were “void from inception.”

In addition to violating the pension anti-assignment provisions of federal and South Carolina law, the complaint asserts the following additional violations by Defendants:

  • Engaging in a deceptive practice by failing to disclose the true nature of the transaction, i.e., a loan rather than a sale of future payments. Notably, marketing materials related to these products disclaimed that the sale of future payments constituted a loan. However, such an assertion is undercut by Defendants’ pre-transaction credit checks of consumers, their requirement that consumers authorize the automatic debit of payment amounts from their bank accounts, and the fact that consumers could repay the contracts from sources other than the contracted-for income stream.
  • Engaging in a deceptive practice by affirmatively telling consumers, e.g., in collections attempts, that the loan transactions were legal, valid, and enforceable. This alleged practice was also listed separately as an unconscionable debt collection practice in violation of the South Carolina Consumer Protection Code.
  • Engaging in the unfair practice of failing to disclose the interest rates on the loans, thereby depriving consumers of information necessary to determine that the product was usurious under state law.
  • Engaging in the business of making “supervised loans” without a license, owing to Defendants’ brokering of consumer loans with finance charges in excess of 12% per year.
  • Failure to make notice filings with and pay certain fees to the state of South Carolina, each of which is required for in-state actors that take assignments of loans and engage in collections activities.

 Takeaways

  • Most of the complaint’s counts fall squarely under the CFPB’s authority to police “unfair, deceptive, or abusive acts or practices” (UDAAP), though only the unfairness and deceptiveness prongs are explored here. Although the CFPB could have opted to assert an abusiveness claim on these facts, the CFPB has recently stated that it may opt to conduct a rulemaking to define the term “abusive” rather than to explore that concept’s contours through enforcement actions.
  • As envisioned by the Dodd-Frank Act, state regulators, state attorneys general, and the CFPB continue to serve as partners in aggressively enforcing federal and state consumer protection laws. Here, the ability for the regulators to bring in a single action all possible federal and state claims increases the bargaining power on the government’s side of the table.
  • At the heart of this enforcement action are allegations that Defendants themselves, when brokering and/or collecting pension assignments, made misstatements or omissions regarding the nature of the product, i.e., that it was not a loan, that the underlying obligation was valid, and failing to disclose the interest rate. Even if the Defendants had not made their own misrepresentations to consumers, however, one can easily imagine the CFPB and state regulators bringing a similar suit but alleging Defendants’ secondary liability, e.g., aiding and abetting liability, for the misstatements of the lender or other brokers.
  • This action should serve as a cautionary tale to those involved at all stages of marketing and brokering loan products. Misrepresentations, especially when made to consumers, may implicate any party who touches the loan, not only the lender.
    • Although the purported facts in this case are somewhat extreme, many of these same allegations could be asserted against one brokering, or collecting upon, a loan made by a lender not licensed to make “supervised” loans above the base usury limit in a given state. This point highlights the need for adequate due diligence by all parties in sophisticated loan transactions.
  • Federal and state regulators frequently target their enforcement resources on matters affecting service members and veterans. As a complement to federal law, various state laws impose affirmative duties upon lenders and loan brokers when dealing with service members. Those with veteran-facing businesses are well advised to scrutinize their policies and procedures relevant to marketing, making, and collecting on loans to military members and their families, e.g., the Servicemembers Civil Relief Act (SCRA), the Military Lending Act (MLA), and similar state laws.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Chicago
Kenneth M. Kliebard
Gregory T. Fouts

Texas
David I. Monteiro
Michael A. Cumming
Victor H. Cruz

Washington, DC
Charles M. Horn
Eamonn K. Moran
Nicholas M. Gess



[1] Read more about those settlements here and here.

[2] See 38 U.S.C. § 5301(a).

[3] See S.C. Code § 37-3-403.