In representing fintech companies and other lenders, we increasingly confront claims against debt buyers or entities with bank partner relationships brought under Pennsylvania’s Consumer Discount Company Act (CDCA) and the Loan Interest and Protection Law (LIPL). This article highlights a recent case addressing the CDCA decided by the United States Court of Appeals for the Third Circuit.

By way of background, Pennsylvania generally regulates interest rates under LIPL and establishes a “maximum lawful rate of interest” of 6% for loans of $50,000 or less. The CDCA requires those in “the business of negotiating or making loans or advances of money on credit” up to $25,000 to be licensed to “charge, collect, contract for or receive interest” in excess of what the lender would otherwise be permitted to charge. The CDCA permits licensed entities to offer loans of $25,000 or less at annual interest rates of up to 24%. The CDCA also imposes a broad restriction on unlicensed entities who hold themselves out as “willing or able to arrange for or negotiate” loans of $25,000 or less from charging or collecting interest rates in excess of 6%. This section does not apply if no fee is received for the reference.

The Third Circuit recently addressed the applicability of the CDCA. In Petro v. Lundquist Consulting Inc., the Third Circuit cited its precedent in holding that the word “negotiate” means “to bargain,” so purchasers of debt that were not involved in making a loan were outside of the provisions of the CDCA. The plaintiff in Petro argued that this analysis only applied to one section, which restricts unlicensed entities, and that a debt collector could be found to be in violation of § 6214, which provides that “[a] licensee may not sell contracts to a person or corporation not holding a license under this act without the prior written approval of the Secretary of Banking.”

The Pennsylvania Department of Banking and Securities filed an amicus curiae letter explaining that “the plain language of [§] 6203.A [of the CDCA] makes clear that the restrictions in the statute only apply to entities in the business of negotiating or bargaining for the initial terms of loans or advances.” The Department further clarified that “an unlicensed entity that purchases charged-off accounts from a CDCA licensee does not need to obtain prior written approval from the Department.”

The Third Circuit agreed with the Department and held that the CDCA does not apply to debt collectors. In an emphatic blow to future claims attempting to hold debt collectors liable under the CDCA, the Third Circuit stated, “[t]he CDCA is intended to regulate consumer credit, not to regulate the collection of consumer debt.”

Our Take:

As plaintiffs continue to bring actions under the CDCA and LIPL, lenders and debt buyers need to focus on these statutes as well. The decisions in Petro and other cases help to provide clarity as lenders and debt buyers navigate Pennsylvania’s interest rate landscape.