Consumer Bank Partnerships In Jeopardy in Maryland

In late June, the Maryland Court of Appeals, Maryland’s highest court, affirmed in  Maryland Commissioner of Financial Regulation v. CashCall, Inc. that a non-bank partner cannot promote loans originated by a bank unless the nonbank partner is licensed as a credit services business and the loans comply with substantive Maryland law. Court of Appeals, No. 80, September Term 2015 (June 23, 2016), affirming Court of Special Appeals, No. 1477, September Term 2013 (October 27, 2015).  The decision hampers the ability of nonbank partners to market loans on behalf of a bank in Maryland unless they acquire a credit services business license. Continue reading “Consumer Bank Partnerships In Jeopardy in Maryland”

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New York Bill Calls For Study of Online Small Business Loans

In what likely signals the first step in an ongoing campaign to regulate small business lending in the Empire State, New York Assembly Bill 10440, introduced May 27, 2016, would requires the Superintendent of Department of Financial Services to study and issue a report on online small business lending products and platforms that originate from lenders licensed by New York state or advertised to small businesses within the state. The study mandate would capture all online lenders advertising to New York merchants, whether they originate the loans through a bank partnership or directly as an unlicensed lender relying on the law of another state.

The study must address – at a minimum – the following:

(a) whether online lenders are offering credit at reasonable and transparent  interest rates and charging reasonable and transparent fees and  payment terms;

(b) whether lenders  offer  inclusive  and  non-discriminatory  credit access and observe fair lending practices;

(c) what type of underwriting is conducted before issuing credit;

(d)  whether lenders report loan repayment information to major credit bureaus and consult the borrower’s credit data when underwriting a loan;

(e) whether lenders are offering small businesses the opportunity  for further financial and business planning and the opportunity to establish a more traditional, long-term banking access to credit; and

(f)  a  review  of  any other products or practices the superintendent deems relevant to small business access to capital.

The study must be completed by January 1, 2018.

The New York legislature adjourns June 16, so it seems unlikely that the bill would be approved this session.

New York-2015-A10440-Introduced

Court Upholds Class Action Waiver in MCA Lawsuit

The U.S. District Court for the Eastern District of Pennsylvania recently denied a motion to certify a class of Korean and other Asian businesses that alleged that the merchant cash advance transactions into which they entered with GOT Capital LLC violated the Racketeer Influenced and Corrupt Organizations Act. The plaintiff merchants, who originally filed a complaint asserting violations of virtually every consumer credit law, argued that GOT Capital specifically targeted them because of their status as Korean-American and Asian-American businesses in Pennsylvania, New York, New Jersey, Texas, California and the United Kingdom. GOT Capital opposed the motion for class certification by pointing out that the merchant cash advance agreement contained the following class action waiver clause: Continue reading “Court Upholds Class Action Waiver in MCA Lawsuit”

Solicitor General Issues Brief in Madden

In response to the U.S. Supreme Court’s request, the Solicitor General submitted its brief in connection with the petition for certiorari in Madden v. Midland Funding, giving insight into the government’s view of national bank preemption. The brief addresses the question of whether the National Bank Act, which preempts state usury laws regulating the interest a national bank may charge on a loan, continues to have preemptive effect after the national bank has sold or otherwise assigned the loan to another, nonbank entity. The Solicitor General rejected the analysis of the U.S. Court of Appeals for the Second Circuit in Madden, characterizing the appellate court’s conclusion that  applying state usury laws to assignees of national banks does not significantly interfere with the bank’s power to sell its loans as an “unduly crabbed conception of (National Bank Act) preemption.” Although the Solicitor General noted that the Madden decision was incorrect, and that state usury laws should not apply to loans made by national banks, it urged the Supreme Court to reject the petition for certiorari because Madden would be a “poor vehicle for resolution” of the question presented.

Solicitor General Brief in Madden

 

CFPB Issues Title Lending Report

The Consumer Financial Protection Bureau today signaled that it is targeting the title loan business. The CFPB released a report that demonstrates that 20% of borrowers who obtain a single-payment auto title loan have their car or truck seized by their lender when they default. According to the CFPB’s research, lenders renew more than four-in-five of these loans on the due date because borrowers could not otherwise repay the loan. The report examined nearly 3.5 million anonymized, single-payment auto title loan records from nonbank lenders from 2010 through 2013. The CFPB concluded from its study that these auto title loans have issues similar to payday loans, including high rates of consumer reborrowing, which can trigger high costs in fees and interest.

Treasury Issues Online Marketplace Lending White Paper

The U.S. Department of Treasury issued its much-anticipated marketplace lending white paper. The white paper, Opportunities and Challenges in Online Marketplace Lending, makes several recommendations to encourage safe growth and access to credit through the continued developments of online marketplace lending, including:

1. Support for more robust small business borrower protections and effective oversight;

2.  Ensuring a sound borrower experience and back-end operations;

3.  Promotion of a transparent marketplace for borrowers and investors;

4.  Expanding access to credit through partnerships that ensure safe and affordable credit;

5. Supporting the expansion of safe and affordable credit through access to government-held data; and

6.  Facilitate interagency coordination through the creation of a standing working group for online marketplace lending.

Treasury consulted with staff from other agencies including the Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (FRB), Federal Trade Commission (FTC), Office of Comptroller of the Currency (OCC), Small Business Administration (SBA), and Securities and Exchange Commission (SEC).

The white paper is available online here.

Forum Selection Clause Upheld in the 7th Circuit

The extension of financing to small business has undergone something of a revolution in the last few years. With the growth of Independent Sales Organizations and the advent of online lending, more and more small businesses are obtaining credit from alternative finance sources. Many of this alternative financiers operate with certain contractual clauses hard-baked into their merchant-facing agreements. A recent U.S. Court of Appeals decision sheds light on one clause commonly found in these agreements – the forum selection clause.

A forum selection clause, although anathema in a consumer financing agreement, is fairly common in a commercial agreement. The clause binds the parties to face lawsuit (or bring lawsuit) in a specific court. For small business financiers with a nationwide footprint, the forum selected is usually one that is convenient to them, but inconvenient to merchants who do not happen to reside in the same location. Forum selection clauses allow small business financiers to obtain consistency in the enforcement of judgments and certainty of processes necessary to file litigation. Forum selection clauses are generally not prohibited in a commercial setting. Continue reading “Forum Selection Clause Upheld in the 7th Circuit”

2016 Consumer Financial Services Conference

Hudson Cook LLP recently held its Consumer Financial Services Conference. I presented on two panels. The PowerPoint presentations for each follow:

BANK PARTNERSHIP AND THE VALID WHEN MADE DOCTRINE: UPDATE ON MADDEN V MIDLAND

Panelists:
Cathy Brennan, Partner, Hudson Cook, LLP, Hanover, MD
Meghan Musselman, Partner, Hudson Cook, LLP, Hanover, MD
Joseph Vitale, Partner, Schulte Roth & Zabel LLP, New York, NY

Description of Panel:
In the recent decision in Madden v. Midland Funding, LLC, the U.S. Court of Appeals for the Second Circuit held that National Bank Act preemption of state usury laws did not apply to accounts owned and serviced by Midland Funding, LLC, a non-bank debt buyer, even though a national bank originated the account. The panel will discuss how the decision undermines the “valid when made” theory and impedes the ability of national banks to sell loans they originate, thus reducing their ability to lend. The panel will also discuss the impact on anyone involved in a bank partnership model of lending and on those purchasing loans or lines of credit. Panelists will also discuss strategies for addressing the challenges presented by Madden, including licensing and deal structure responses.

Madden Panel

MERCHANT CASH ADVANCE AND SMALL BUSINESS LENDING SESSION: REGULATORY DEVELOPMENTS INCLUDING ISO AND BROKER ISSUES AND GOVERNMENT ADVOCACY

Panelists:
Cathy Brennan, Partner, Hudson Cook, LLP, Hanover, MD
Shawnielle Predeoux, Associate, Hudson Cook, LLP, Hanover, MD
Tom Sullivan, Executive Director, Coalition for Responsible Business Finance, Washington, DC

Description of Panel:
Panelists discuss recent activity by federal regulators and industry efforts to advocate for increased access to capital for merchants. Discussion also includes legal developments and best practices for working with independent sales organizations and brokers.

MCA Panel

Death by a Thousand Cuts Update on Small-Dollar Lending

Death By A Thousand Cuts: Update on Small-Dollar Lending
By Catherine M. Brennan, Justin B. Hosie, K. Dailey Wilson, and Erica A.N. Kramer
Description
During the past year, small-dollar lenders continued to face increasing legal and regulatory scrutiny at the state and federal level.  One large lender blamed increasing regulatory pressure as the leading reason for ceasing to offer payday and title loans. This survey reviews some of the key investigation, enforcement, litigation, legislation, and rulemaking developments since August 2014

New York Federal Trial Court Provides Madden Relief for Bank Partnerships

In a decision favorable to the continued vitality of bank partnerships, a federal trial court in New York recently ruled in favor of federal preemption on behalf of a national bank and its agent. In Edwards v. Macy’s Inc., 2016 U.S. Dist. LEXIS 31097 (S.D.N.Y. March 9, 2016), the court concluded that federal law preempted a lawsuit raising state law claims under an unfair deceptive acts and practices statute against a national bank and its nonbank partner. In so doing, the court rejected the consumer’s assertion that the U.S. Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding should allow the claims to proceed against the nonbank partner. Continue reading “New York Federal Trial Court Provides Madden Relief for Bank Partnerships”