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The Business Lawyer

Spring 2023 | Volume 78, Issue 2

The Gathering Storm: Compliance Issues Facing Small-Dollar Lenders in 2022

Justin B Hosie, Dailey Elaine Wilson, Andrea Cottrell, and Christopher J Capurso


  • Small-dollar lenders have continued to wait for a decision on the Consumer Financial Protection Bureau’s (“CFPB”) final rulemaking addressing payday, vehicle title, and certain high-cost installment loans.
  • Several decisions in courts across the country have looked at consumer protection issues involving small-dollar lenders.
  • This survey addresses compliance issues related to the small-dollar lending industry, including federal and state enforcement actions, consumer litigation, and new state laws and regulations.
The Gathering Storm:  Compliance Issues Facing Small-Dollar Lenders in 2022
Photo by John Towner

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Over the past year, small-dollar lenders have continued to wait for a decision on the Consumer Financial Protection Bureau’s (“CFPB”) final rulemaking addressing payday, vehicle title, and certain high-cost installment loans. In addition, federal and state regulators have continued to take action to curtail certain practices. Several decisions in courts across the country have looked at consumer protection issues involving small-dollar lenders. This survey addresses compliance issues related to the small-dollar lending industry, including federal and state enforcement actions, consumer litigation, and new state laws and regulations.

Federal Enforcement Actions

In July 2021, LendingClub Corporation (“LendingClub”) settled charges against it brought by the Federal Trade Commission (“FTC”). In April 2018, the FTC filed a complaint against LendingClub for claiming “no hidden fees” in its advertisements for unsecured consumer loans. According to the FTC’s complaint, the loans were hundreds of dollars short of the amount expected by consumers because of an up-front fee the company deducted from consumers’ loan proceeds. The FTC further alleged that LendingClub falsely represented that consumer applications had been approved while knowing that many applicants would not qualify for a loan. The settlement requires LendingClub to pay $18 million in penalties and restricts it from making misrepresentations to loan applicants related to the amount of any prepaid, up-front, or origination fees and the total amount of funds that borrowers will receive.

In November 2021, the CFPB filed a lawsuit in a Texas federal district court against FirstCash, Inc. and Cash America West, Inc. (collectively “FirstCash”). The complaint alleges that FirstCash made over 3,600 pawn loans to active-duty servicemembers and their dependents, violating the Military Lending Act (“MLA”) because the loans imposed an APR of over 36 percent. FirstCash also allegedly violated a 2013 CFPB order against its predecessor company prohibiting MLA violations. An amended complaint and answer were filed in June and July 2022 and the case remains pending as of this writing.

In December 2021, in another example of the CFPB revisiting a previous enforcement action, LendUp Loans, LLC (“LendUp”), which no longer makes or collects on loans, agreed to pay a penalty to resolve the CFPB’s lawsuit against it. The CFPB alleged that LendUp engaged in continued illegal and deceptive marketing despite a 2016 consent order prohibiting it from making misrepresentations. According to the CFPB, LendUp allegedly misrepresented the benefits of repeatedly borrowing from the company by advertising that borrowers who climbed the LendUp Ladder would gain access to larger loans at lower rates when, in fact, that was not the case for tens of thousands of consumers. The CFPB also alleged that the lender violated a previous 2016 consent order involving similar allegations. LendUp agreed, among other things, to be permanently restrained from advertising, marketing, promoting, offering for sale, selling, or providing any extension of credit; receiving any consideration or payment from those enumerated activities; and assisting anyone in those enumerated activities.

In December 2021, the CFPB issued marketing orders that required five Buy-Now-Pay-Later (“BNPL”) providers to provide the CFPB with information about their size, scope, and business practices. The following month, the CFPB invited public comments and received several, including a joint comment from the attorneys general of twenty states, Equifax, Experian, the Center for Responsible Lending, Consumer Reports, and the American Financial Services Association.

Also in January 2022, the District of Columbia federal district court dismissed the National Association for Latino Community Asset Builders’ (“NALCAB”) challenge to the repealing of a portion of federal rulemaking on payday, title, and high-cost installment loans, reasoning that the NALCAB lacked standing to challenge the repeal. The court held that NALCAB did not meet the first step for standing requirements for an organization set forth by the D.C. Circuit because it failed to show that the repeal “perceptibly impaired [its] ability to provide services” and “[made] it more difficult for [it] to conduct [its] activities.”

In April 2022, the CFPB released a report on the use of extended payment plans by payday loan consumers. To assemble the report, the CFPB reviewed public reports compiled by state regulators. The CFPB characterized the findings in the report as showing that “few payday loan borrowers are benefiting from no-cost extended payment plans,” “borrowers continue to pay for costly loan rollovers,” and “the payday business model continues to depend on high rollover rates and fees.”

In May 2022, the CFPB’s lawsuit against CashCall, Inc. and other related parties (collectively, “CashCall”), originally filed in 2013, continued. CashCall used an arrangement with a Native American–owned finance company to claim sovereign immunity from usury laws. The CFPB alleged that CashCall violated the Consumer Financial Protection Act because it funded, purchased, serviced, and collected installment loans made by a tribal-affiliated lender.

In the most recent development, the Ninth Circuit concluded that CashCall acted recklessly, subjecting it to a tier-two civil penalty rather than the tier-one penalty previously imposed. The Ninth Circuit noted that counsel and tribal law experts warned CashCall that the model posed significant risk and likely would not comply with applicable law. The Ninth Circuit accordingly vacated the civil penalty and remanded with instructions that a tier-two penalty be assessed. Reckless violations trigger a second-tier penalty under the Consumer Financial Protection Act of 2010, meaning fines of $25,000 per day rather than $5,000 under the first tier. The decision also permits the CFPB to renew its bid for $200 million in restitution from CashCall.

State Enforcement Actions

During the past year, the Pennsylvania Attorney General secured both state and federal court victories against title lenders. At the federal level, a title lender’s lawsuit against the attorney general was dismissed in the Middle District of Pennsylvania. In 2018, the Pennsylvania Attorney General sent a letter to the title lender inquiring about its lending practices, specifically whether the title lender’s interest rates complied with Pennsylvania usury caps. In response, the title lender sued the attorney general, alleging that the title lender did not operate in Pennsylvania and, thus, the attorney general had no authority to investigate the title lender. The court disagreed and granted the attorney general’s motion for judgment on the pleadings, finding that “the Attorney General is entitled to investigate and test Plaintiff ’s claim that no part of the company’s loan transactions took place in Pennsylvania.”

At the state level, the Philadelphia Court of Common Pleas ordered a title lender to pay a $3.2 million penalty and $5.3 million in restitution to borrowers. The attorney general alleged that the title lender violated Pennsylvania’s Unfair Trade Practices and Consumer Protection Law by making title loans with interest rates in excess of the state’s 6 percent usury cap for unlicensed lenders, with most loans allegedly carrying annual interest rates over 200 percent.

In September 2021, the South Carolina Department of Consumer Affairs secured a favorable reversal of a state circuit court opinion regarding Cash Central, an online lender. In South Carolina, licensed supervised lenders may charge interest at either 18 percent annually or at any rate specified on a maximum rate sheet filed with the Department of Consumer Affairs. Here, the online lender was a licensed supervised lender, but did not file a maximum rate sheet. The online lender, however, originated loans with rates in excess of 18 percent per year. The Department of Consumer Affairs sued the online lender, arguing in part that the online lender failed to post the maximum rate sheet and that the online lender is required by law to take the interest rates on outstanding loans down to 18 percent per year and refund consumers the excess. The state circuit court disagreed and merely ordered the online lender to pay a small civil penalty. The Department of Consumer Affairs appealed, and the state court of appeals reversed the circuit court’s decision. Specifically, the court of appeals found that supervised lenders must file a maximum rate sheet to charge rates in excess of 18 percent per year and that the online lender must refund any excess interest charges.

That same month, the Nevada Department of Business and Industry similarly concluded an appeal of a lower court decision against it, though with more mixed results. In this instance, the title lender originally sued the department in response to a regulatory investigation under Nevada’s title loan laws. Those laws provide that title loans legally exceeding the normal thirty-day limit may not be subject to “any extension” and that the amount of a title loan is limited to the “fair market value” of the vehicle securing the title loan. The department’s investigation concluded that the title lender violated these requirements by extending loans that may not be subject to extension and may not include interest and fees in its fair market value calculations. The state district court adjudicating the title lender’s suit disagreed, finding that the title lender’s “refinancing” of title loans did not constitute extensions and that the fair market value calculations should only take into account the principal amount of the loan in question. On appeal, the Nevada Supreme Court agreed with the department’s contention that “refinancings” constituted “extensions” for purposes of the title lending laws. The supreme court, however, agreed with the district court that only the principal amount of a title loan—and not any interest or fees—should be considered in the fair market value calculations.

In November 2021, the Illinois Attorney General and the Illinois Department of Financial and Professional Regulation entered into a settlement with multiple online lead generators for payday lenders. The pair alleged that the lead generators originated payday loans without a license and arranged payday loans for out-of-state lenders, many of which were allegedly unlicensed, by collecting personal financial information and selling it to payday lenders The settlement prohibits the lead generators from engaging in the following activities in Illinois or involving Illinois consumers without a license: arranging or offering small-dollar loans; advertising or offering any small consumer loan arrangements or lead generation services; or providing services related to arranging or offering small dollar loans.

Consumer Litigation

In January 2022, a court in the Eastern District of Pennsylvania found that Pennsylvania law applied to claims brought by a Pennsylvania resident against TitleMax of Delaware, Inc. (TMX), a Delaware title lender. The plaintiff agreed to a title loan with an annual percentage rate of 132.01 percent from TMX after traveling from Pennsylvania to one of TMX’s Delaware locations. He then sued TMX and its president for violating Pennsylvania’s usury law and the Truth in Lending Act (“TILA”). Based on a contractual choice of law provision, TMX argued that Delaware law should apply. Despite the Delaware choice-of-law provision, the court held that Pennsylvania had a greater interest than Delaware in enforcing its usury laws with regard to its residents and therefore refused to dismiss the claims against TMX. However, the court did dismiss the claims against TMX’s president without prejudice, finding them “cursory and conclusory as pleaded.” Finally, the court found that the plaintiff had pleaded sufficient facts to sustain his claims that TMX’s application process prevented him from viewing TILA disclosures; the disclosures did not reflect the parties’ legal obligations; and he never consented to receive TILA disclosures electronically.

Also in another case involving TMX in January 2022, the Third Circuit ruled that the Pennsylvania Department of Banking and Securities (“DBS”) may investigate and apply Pennsylvania’s Consumer Discount Company Act (“CDCA”) and Loan Interest and Protection Law (“LIPL”), which limit interest rates to 6 percent on most loans under $50,000, to out-of-state vehicle title lenders without violating the Dormant Commerce Clause of the U.S. Constitution. TMX did not have any offices, employees, agents, or storefronts in Pennsylvania and was not licensed as a lender in Pennsylvania. TMX operated storefront locations outside of Pennsylvania, and offered loans to residents of various states, including Pennsylvania, with annual rates up to 180 percent.

The Pennsylvania DBS issued a subpoena requesting documents related to TMX’s transactions with Pennsylvania residents. TMX stopped making loans to Pennsylvania residents after receiving the subpoena, and it filed a lawsuit seeking injunctive and declaratory relief. The trial court granted TMX’s motion for summary judgment and denied DBS’s cross-motion, concluding that because TMX’s loans are completely made and executed outside Pennsylvania, the subpoena’s effect is to apply Pennsylvania’s usury laws extraterritorially, violating the Dormant Commerce Clause.

On appeal, the Third Circuit reversed, holding that applying the CDCA and the LIPL to TMX’s lending activity because its activities do not occur “wholly outside” of Pennsylvania. It noted that, for example, TMX obtains security interests on Pennsylvania-registered automobiles, records liens with the Pennsylvania Department of Transportation, and may repossess vehicles in Pennsylvania, thus taking an interest in property located and operated in Pennsylvania. Accordingly, the court held that the DBS may investigate and apply the CDCA and the LIPL to TMX without violating the Dormant Commerce Clause.

In March 2022, another court in the Eastern District of Pennsylvania held that a plaintiff may seek declaratory relief in an action brought under the LIPL. The plaintiff obtained credit from TMX and then sought declaratory relief under the LIPL, alleging that the loan’s interest rate was usurious, and asking for a rate reduction to the LIPL’s 6 percent limit. TMX argued in its motion to dismiss that declaratory relief was not an available remedy under the LIPL. The court rejected the argument, finding that the LIPL provides that its remedies and penalties are “supplementary to and shall not repeal or otherwise effect [sic] the remedies and penalties provided in any other act," and that one such remedy is declaratory relief under the Pennsylvania Declaratory Judgment Act. Therefore, the court found that the plaintiff could seek declaratory relief in an action brought under the LIPL.

In April 2022, the Missouri Court of Appeals held that a trial court erred in limiting a creditor’s interest charges, and instead should have applied the higher contract rate. The plaintiff creditor, MM Finance, LLC, sued to collect on a note, requesting prejudgment and post-judgment interest at the contract rate of 360 percent. The trial court found that the contract rate was usurious, and instead only awarded prejudgment and post-judgment interest at a rate of 9 percent. Reversing this ruling, the Missouri Court of Appeals considered the plain language of Missouri’s statutes and held that the underlying contract, “despite its offensive and obscenely high interest rate,” was “authorized by the legislature and, thus, enforceable” absent “some other statutory limitation.”

In May 2022, the Maryland Court of Appeals ruled that a credit grantor that knowingly violates Maryland’s Credit Grantor Closed End Credit Provisions (“CLEC”) is required to forfeit three times the amount of interest, fees, and charges collected in violation of CLEC. In a class action against Santander Consumer USA, Inc., as assignee of a retail installment contract to finance the purchase of a motor vehicle, plaintiffs alleged that Santander charged impermissible convenience fees. After the case was removed to federal district court, the court certified a question to the Maryland Court of Appeals. The court essentially asked if section 12-1018(b) requires a credit grantor found to knowingly violate the CLEC to return three times: (1) all amounts collected by the credit grantor in excess of the principal amount financed; (2) only those amounts collected that the borrower contends violate the CLEC; or (3) some other amount? Applying “principles of statutory construction,” including noting that “the General Assembly” “meant what is said and said what it meant,” Maryland’s highest court noted that the “amounts that a credit grantor charged in violation of the CLEC are the amounts to be trebled for a knowing violation of the statute.” Thus, the court held that, under section 12-1018(b) of the CLEC, a credit grantor that knowingly violates the CLEC is required to forfeit three times the amount of interest, fees, and charges collected in violation of CLEC.

State Legislative and Regulatory Activity

In late 2021, the Virginia Bureau of Financial Institutions issued regulations regarding both motor vehicle title and short-term loans. The regulations largely reflect statutory changes made by the Virginia General Assembly in 2020. The regulations now require applications for both motor vehicle title and short-term loans to include a specific written acknowledgement in the loan application, indicating that the applicant has received the required pamphlet, which must be initialed and dated by the applicant. The regulations also now provide that a licensee’s website and mobile applications are treated the same as physical locations for the purposes of the prohibition against conducting “other businesses.” Regulations prohibit motor vehicle title lenders from offering transactions other than check cashing and short-term loans from the same physical location and vice-versa. Motor vehicle title lenders and short-term lenders are also prohibited from offering such transactions through their website and mobile applications.

Also in 2021, Hawaii overhauled its small-dollar lending provisions, imposing a licensing requirement for “installment lenders” and establishing substantive requirements for consumer loans of $1,500 or less, effective in January 2022. The Hawaii law broadly defines the term “installment lender” to mean any person who is in the business of offering or making a consumer loan, who arranges a consumer loan for a third party, or who acts as an agent for a third party, regardless of whether the third party is exempt from licensure … or whether approval, acceptance, or ratification by the third party is necessary to create a legal obligation for the third party, through any method including mail, telephone, the Internet, or any electronic means.” The Hawaii law limits the loan amount to $1,500 and the fees to 50 percent of the loan amount.

In 2022, the New Mexico legislature amended its lending statutes to include a 36 percent rate cap on loans made by Small Loan Act licensees. House Bill 132 requires the annual percentage rate to be calculated pursuant to federal law, with a few notable differences. The annual percentage rate must include charges for any ancillary product or service sold, as well as any credit insurance premium or fee or any other fee related to insurance, even if such charges are normally excluded from the calculation of the finance charge under Regulation Z. The annual percentage rate calculation also does not include a fee of 5 percent of the total principal amount on a loan of $500 or less provided the fee is not imposed on any borrower more than once within a twelve-month period. House Bill 132 also enacts a “predominant economic interest” test for entities that partner with depository institutions to originate loans. A person acting as an agent, service provider, or in any other capacity for another entity otherwise exempt from the Small Loan Act is required to obtain a Small Loan Act license if the person holds, acquires, or maintains the predominant economic interest in the loan; the person markets, brokers, arranges, or facilitates the loan and holds the right, requirement, or first right of refusal to purchase the loan, the receivables, or interests in the loan; or the totality of the circumstances indicate the person is the true lender and that the transaction is structured to evade application of the Small Loan Act.

In addition, the Alabama Legislature amended the Alabama Small Loan Act in 2022 to allow those lenders who assess the alternative finance charges provided in Alabama Code section 5-18-15(m)(1) to charge a closing fee. The closing fee may not exceed the lesser of 4 percent of the loan amount or fifty dollars and may be paid from the proceeds of the loan. The closing fee must be rebated upon prepayment; however, the lender may retain up to twenty-five dollars.

Likewise, the 2022 Georgia General Assembly amended the Georgia Installment Loan Act to require both those making installment loans and those acting as an installment lender to obtain a license. The Act defines the term “installment lender” to mean “any person that advertises, solicits, offers, or makes installment loans or services installment loans made by others, excluding loans made by affiliated entities.” The Act also expressly exempts lines of credit, effectively permitting the borrower to take individual draws of credit on the line in amounts less than $3,000 in certain scenarios as long as the credit limit on the line exceeds $3,000