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The Business Lawyer

Spring 2024 | Volume 79, Issue 2

So Long, Farewell: Compliance Issues Facing Small-Dollar Lenders in 2023

Justin B Hosie, Kathryn Wilson, Andrea Cottrell, and Christopher J Capurso

So Long, Farewell: Compliance Issues Facing Small-Dollar Lenders in 2023

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  • Over the past year, a case involving the Consumer Financial Protection Bureau’s payday, vehicle title, and certain high-cost installment loans rulemaking made its way to the Supreme Court.
  • Federal and state regulators have continued to take action to curtail certain practices.
  • 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.


Over the past year, a case involving the Consumer Financial Protection Bureau’s (“CFPB”) payday, vehicle title, and certain high-cost installment loans rulemaking made its way to the Supreme Court. Federal and state regulators have continued to take action to curtail certain practices. 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 Rulemaking Litigation

In October 2022, the Fifth Circuit reviewed an appeal made by trade associations suing the CFPB about its rulemaking on payday, title, and high-cost installment loans (“Payday Loan Rule”). The U.S. District Court for the Western District of Texas denied summary judgment to the trade associations, which claimed that the rulemaking exceeded the CFPB’s authority, that it violated the Administrative Procedures Act (“APA”), and that the rule was adopted by an agency that was unconstitutionally funded and had a director whose tenure protection violated the separation of powers in the Constitution, and granted the CFPB’s cross-motion for summary judgment.

On appeal, the Fifth Circuit held that the CFPB’s promulgation of the Payday Lending Rule did not exceed its authority under either its statutory funding provision or the APA. The court further held that the “issuing Director's unconstitutional insulation from removal” did “not in itself invalidate the rule,” because it did not inflict any harm on the plaintiffs. The court further held that the trade associations “fail[ed] to demonstrate cognizable harm from that injury.” Likewise, the court held that the CFPB’s “rulemaking authority” did not “transgress the nondelegation doctrine” that prohibits Congress from delegating legislative power without “an intelligible principle” to guide an agency’s discretion. However, the court of appeals also held that the CFPB's funding structure violated the Appropriations Clause and the separation of powers principle of the Constitution and that the CFPB’s unconstitutional funding scheme inflicted harm on the associations, which warranted vacating the rule. The U.S. Supreme Court granted a petition for writ of certiorari and will decide whether the statute providing funding to the CFPB violates the Appropriations Clause and whether the Fifth Circuit erred in vacating the Payday Lending Rule.

Federal Agency Activity

In May 2023, the CFPB entered into a consent order with OneMain Financial, one of the nation’s largest non-bank installment lenders, for unfair and deceptive acts or practices. OneMain markets, sells, and finances credit insurance and non-credit insurance optional add-on products in connection with originating and renewing loans. The CFPB alleged that OneMain failed to refund interest charged to 25,000 customers who cancelled purchases of optional add-on products within a purported “full refund period” that was described by OneMain employees as “cost-free.” The CFPB also alleged that OneMain deceived borrowers about needing to purchase the products in order to receive a loan and that numerous customers only discovered that the products were attached to their loan when they received a post-origination letter. The consent order requires OneMain to make cancellation of add-on products easier, to double the period in which a consumer can cancel an unused add-on product without cost from thirty to sixty days, and to include interest in refunds after add-on product cancellations. OneMain paid $10 million in refunds to consumers it harmed, and an additional $10 million penalty to the CFPB’s victims’ relief fund.

In February 2023, the CFPB entered into a consent order with TitleMax’s parent company, TMX Finance, LLC, for violations of several federal laws. The CFPB alleged that TitleMax violated the Military Lending Act (“MLA”) by extending title loans to covered borrowers with interest rates exceeding the MLA’s 36 percent military annual percentage rate cap, utilizing arbitration provisions prohibited by the MLA, and failing to make required disclosures. The consent order also included violations of the Truth in Lending Act (“TILA”) and the Consumer Financial Protection Act of 2010 based on TitleMax engaging in unfair acts or practices by charging borrowers for non-file-insurance fees that provided no coverage or benefit because TitleMax had already recorded its liens on the vehicle titles securing the loans. TitleMax also allegedly impermissibly excluded the non-file-insurance fees from the finance charge and thereby understated the finance charges and annual percentage rates. The order required TitleMax to stop its unlawful activities, pay $5,050,000 in consumer redress, and pay a $10,000,000 penalty.

The CFPB published a report analyzing the financial profiles of Buy Now, Pay Later (“BNPL”) consumers in March 2023. According to the report, BNPL consumers are more likely to use other types of credit products like credit cards, personal loans, and student loans. The report cites to a 2022 survey that shows BNPL consumers are also more likely to exhibit measures of financial stress than non-users. Based on other surveys, the report finds that BNPL users are more likely to be highly indebted or have revolving balances or delinquencies on their credit cards compared to consumers who do not use BNPL products, and are more likely to use payday loans, pawn transactions, and bank account overdrafts. The 2023 report followed a CFPB report on BNPL market trends in September 2022 that identified numerous risks associated with BNPL products. The earlier report identified concerns regarding disclosures, dispute resolution, automatic payments, multiple payment re-presentments, late fees, data harvesting, and over-extension.

The CFPB sued ACE Cash Express, a small-dollar lender, in July 2022 alleging that it concealed its free repayment plan options. The CFPB also alleged that the lender initiated four debit card withdrawals from some consumers when its authorization said it would only make three attempts. The court ordered all proceedings in the action stayed in October 2022 until after the Fifth Circuit issues its mandate in the Payday Loan Rule case that is now before the Supreme Court.

Consumer Litigation

In a series of cases in July 2022, the North Carolina Court of Appeals upheld the denial of a title lender’s motions to dismiss for lack of personal jurisdiction and failure to state a claim based on the title loan agreement’s choice of law provision. The cases all involved title loans between AutoMoney, a South Carolina title lender, and North Carolina residents. The court held in each case that specific personal jurisdiction existed with regard to AutoMoney for several reasons. AutoMoney targeted advertising to North Carolina residents, contracted with North Carolina residents, collected payments from North Carolina residents, made collection calls to North Carolina residents in North Carolina, placed a lien on the plaintiffs’ vehicles titled in North Carolina using the North Carolina Department of Motor Vehicles, and took possession of the plaintiffs’ vehicles in North Carolina. Furthermore, North Carolina had an interest in these contacts by virtue of the state’s laws concerning title loans. The court also upheld the refusal to dismiss for failure to state a claim based on the title loan agreement’s choice of law provision, finding that application of South Carolina law to avoid application of various North Carolina laws, including the North Carolina Consumer Finance Act and the usury law, would violate the state’s fundamental public policy to protect North Carolina consumers against usurious title loans.

In February 2023, the Eleventh Circuit held that a plaintiff had standing to sue a lender for TILA violations based on the actions of the lender’s contractor. FTL Capital Partners, LLC (“FTL”) partnered with heating, ventilation, and air conditioning contractors to finance such products though home improvement loans. The plaintiff applied and was approved for a loan from FTL through its partner contractor Fast AC. Fast AC’s employee filled out the FTL loan application for the plaintiff, and never showed the plaintiff any of the loan documents. The plaintiff sued, alleging that FTL violated the TILA by failing to disclose key loan terms, like the loan amount, the finance charge, and the monthly payments. The district court found that the plaintiff lacked standing to bring the TILA claim. The Eleventh Circuit disagreed, finding that “if Fast AC was acting as FTL’s agent in failing to provide the TILA-mandated disclosures, then [the plaintiff ’s] injuries are traceable to FTL” and the plaintiff had standing to bring the agency-based TILA claim.

In Crews v. TitleMax of Delaware, Inc., a Pennsylvania resident sued TitleMax of Delaware, claiming that by lending to Pennsylvania residents at rates in excess of 6 percent per year, TitleMax violated Pennsylvania's Loan Interest and Protection Law, Consumer Discount Company Act, and Unfair Trade Practices and Consumer Protection Law (“UTPCPL”). The court dismissed only the plaintiff ’s UTPCPL claim. TitleMax argued that the UTPCPL claim should fail because at the time plaintiff had taken out his loan, Delaware federal case had held that “Pennsylvania usury laws did not apply to loans which were entered into in Delaware and which included a choice-of-law clause specifying that Delaware law applied.” It also argued that its conduct was not fraudulent, unfair, or deceptive because it “disclosed all relevant information in an effort to comply with their understanding of the law at the time of the [transaction].”

The plaintiff argued that TitleMax should have been on notice at the time he obtained his title loan that Pennsylvania's usury laws might apply to its title loans to Pennsylvanians based on TitleMax's knowledge that the Delaware decision could be overruled and, therefore, TitleMax's acts were deceptive. The court rejected the plaintiff ’s argument, finding that he alleged that “charging fees above 6% has the ‘tendency or capacity to deceive’ consumers into thinking that lenders may charge such amounts,” but holding that “conduct alone, absent any additional facts, is not fraudulent or deceptive.” According to the court, TitleMax clearly and conspicuously disclosed the interest rate on the loan documents signed by the plaintiff.

State Legislation and Rulemaking

The Texas Office of Consumer Credit Commissioner (“OCCC”) adopted amendments to the state's regulations governing pawnshops effective October 1, 2022. The amendments replaced the requirement that a licensee identify a “responsible person” in its licensing application with a requirement that the licensee list a “compliance officer,” who must be responsible for overseeing compliance and receiving and responding to communications from the OCCC. Where a pawnshop agrees with local law enforcement to hold goods acquired from sale for less than the mandated twenty-day period, the regulations require that the pawnshop maintain a copy of that agreement. In addition, the amendments removed the requirement that the OCCC must provide pawnshops with a display and printed materials at the time of initial licensure, the effect of which is that pawnshops must now either request the materials from the OCCC, or print the materials themselves through the OCCC website.

The Ohio Commerce Department amended regulations implementing the Small Loan Act effective November 28, 2022. Among other things, the amendments provide that licensees may maintain electronic records. However, if those electronic records are located outside Ohio, licensees must, if requested, pay in advance the estimated costs of examination if the regulator determines that in-person examination is necessary. In addition, the amendments provide that a clear display of a licensee's Nationwide Multistate Licensing System and Registry (“NMLS”) license number on an advertisement satisfies the requirement that advertisements clearly indicate the licensee's identity.

The New Mexico Regulation and Licensing Department, Financial Institutions Division (“NMFID”) promulgated regulations outlining the types of charges that may be excluded by small loan licensees in calculating the 36 percent maximum annual percentage rate (“NMAPR”) for compliance with the Small Loan Act. The regulations, effective March 29, 2023, provide that the following charges, among others, cannot be reasonably predicted and thus are excluded from the calculation of the NMAPR: actual expenditures for legal process or proceedings to collect on a small loan, including reasonable attorney’s fees; delinquency fees; third-party payment processing charges, provided that a specific method of payment is not required; insufficient funds fees; and for loans of $500 or less, a charge of 5 percent of the total loan principal, provided that such fee is not imposed more than once in any twelve-month period.

In West Virginia, new legislation effective June 8, 2023, allows employees of licensees to work from residences within 100 miles of a licensee’s West Virginia corporate or branch office, or from other locations for “limited periods of time.” Before permitting a licensee to work from remote locations, a licensee must ensure, among other things, that: no in-person customer interaction takes place at the remote location; the remote location is not designated as a business location; appropriate data and privacy safeguards are in place for licensee and consumer data; and employees are trained and keep confidential all conversations with or regarding consumers at remote locations. In addition, the licensee must establish written policies and procedures to ensure compliance with these requirements and certify compliance annually.

The Wisconsin Department of Financial Institutions, Division of Banking, promulgated regulations providing that, effective September 1, 2023, the licensing, renewal, and regulatory filing processes for licensees in the state, including payday lenders, must be done through the NMLS.

In Minnesota, Minnesota's lending laws were amended effective January 1, 2024, to cap the annual percentage rates (“APR”) on “consumer small loans” and “consumer short-term loans” at a 50 percent all-in APR. The amendment also expressly provides for predominant economic interest and totality-of-the-circumstance tests for true lender purposes, as well as an anti-evasion provision. If the all-in APR on such loans exceeds 36 percent, lenders must engage in an ability-to-pay analysis. The amendment defines “consumer short-term loan” as a loan that has a principal amount, or an advance on a credit limit, of $1,300 or less and requires a minimum payment of more than 25 percent of the principal balance or credit advance within sixty days. “Consumer small loan” is defined as an unsecured loan equal to or less than $350 that must be repaid in a single installment.

Other State Regulatory Activity

The North Carolina Commissioner of Banks issued a memorandum in February 2023 clarifying the scope of North Carolina’s Consumer Finance Act. The memorandum requires that persons that contract for or even indirectly receive charges in connection with any loans in an amount greater than the amount permitted without a license must obtain a license from the commissioner. However, persons making loans of less than $15,000 and below the regulated rate would not need a license. The memorandum noted that banks and other enumerated organizations are exempt from the licensing requirement.

The Massachusetts Division of Banks issued a consent order with Avant, LLC in February 2023 for allegedly engaging in the business of a small loan company without the appropriate license. Under the consent order, Avant paid a $555,000 administrative penalty and agreed that it will not engage in the business of a small loan company without the appropriate license. Avant also agreed not to transact business in Massachusetts under a name or title which contains the word “bank,” “banking,” “bankers,” or any word in a foreign language having the same or similar meaning unless authorized to do so. Avant further agreed to reimburse consumers for fees and interest collected in amounts that exceed a 12 percent annual rate.

In January 2023, the NMFID issued regulatory guidance regarding licensing requirements for BNPL products to incorporate changes to New Mexico laws that took effect on January 1, 2023. The guidance provided that BNPL transactions “are installment loans and, if made in the amount of $10,000 or less, are subject to the statutory requirements of small loans” unless explicitly exempted. It also noted that there is no minimum rate exemption and that there is no exemption for companies located outside of New Mexico.

In December 2022, the Arizona attorney general issued an opinion on earned wage access (“EWA”) products in response to an inquiry whether such products meet the definition of a “consumer loan” under Arizona law that would require a consumer lender license. The opinion stated that an EWA product is not a “consumer loan” if it is offered as a no-interest and non-recourse product because recourse is a key characteristic of “debt” and therefore of “loans.” Furthermore, the transaction cannot be deemed a “loan” under Arizona law if there is no finance charge.

In November 2022, the Court of Special Appeals of Maryland ruled in favor of the Maryland Consumer Protection Division of the Office of the Attorney General (“Division”) in an action involving Cash-N-Go, Inc. (CNGI), a pawnbroker offering motor vehicle title pawn transactions. The Division filed a statement of charges against CNGI alleging that CNGI provided loans and offered credit without a license, charged usurious interest rates, and took prohibited security interests in consumers’ personal property. An administrative law judge determined that CNGI violated Maryland consumer lending laws for unfair and deceptive trade practices. A Maryland circuit court affirmed these findings and an assessment of penalties. On further appeal, the court of special appeals held that the Division could award $2,200,000 in restitution beyond the amount of CNGI’s net proceeds, that civil penalties of $1,200,750 were justified, that CNGI was not entitled to an exemption from the forfeiture of interest or principal, and that CNGI’s owner was jointly and severally liable for restitution.

The Pennsylvania attorney general agreed to a settlement with a motor vehicle title loan company, Dominion Management of Delaware, doing business as CashPoint (“CashPoint”), in September 2022. The attorney general claimed that CashPoint made unlawful loans to Pennsylvania residents. The settlement required CashPoint to refund more than $1.5 million in charges to consumers.

In October 2022, the California Commissioner of Financial Protection and Innovation agreed to a consent order with Buckeye Check Cashing of California, LLC, a licensed deferred deposit originator. The commissioner alleged that Buckeye collected excessive amounts in some transactions, failed to maintain adequate books and records, entered multiple deferred deposit transactions with the same consumers at the same time in some instances, altered one consumer’s check without the consumer’s initials, failed to obtain a personal check in one transaction, and failed to obtain a check in the correct name on another transaction. In addition, in some cases Buckeye allegedly double-collected from customers and over-collected on customer payment plans. The consent order required Buckeye to refund $129,434 to consumers, pay $90,250 in administrative penalties, and make compliance and software changes.

The Wisconsin Department of Financial Institutions (“DFI”) published a response letter addressing loan administration fees charged by licensed lenders in July 2022 clarifying that such a fee may only be charged on consumer loans if the fee does not exceed 2 percent of the principal amount of the loan and only for loans that are secured primarily by an interest in real property, in a mobile home, or in a manufactured home.