The U.S. Court of Appeals for the Ninth Circuit recently reversed a district court’s ruling, which had denied a motion to compel arbitration of Opportunity Financial (OppFi) on the basis that the arbitration clause was substantively unconscionable due to the choice of law provision in the loan agreement containing the arbitration clause. The Ninth Circuit vacated the decision and directed the district court to refer the matter to arbitration.
Yesterday, three trade organizations filed a complaint in Colorado federal court challenging H.B. 1229, Colorado’s effort to limit interest charges by out-of-state financial institutions, which is set to take effect on July 1, 2024. As discussed here, in June 2023, Colorado passed H.B. 1229, limiting certain charges on consumer loans and simultaneously opting Colorado out of §§ 521-523 of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA). Sections 521-523 of DIDMCA empower state banks, insured state and federal savings associations and state credit unions to charge the interest allowed by the state where they are located, regardless of where the borrower is located and regardless of conflicting state law (i.e., “export” their home state’s interest-rate authority). However, § 525 of DIDMCA enables states to opt out of this rate authority with respect to loans made in the opt-out state.
On February 12, ten Rhode Island senators introduced S 2275, a bill proposing to opt Rhode Island out of §§ 521-523 of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA). On February 13, HF 3680 was introduced in Minnesota, proposing to opt-out of DIDMCA expressly as to non-credit card forms of credit. These legislative efforts to opt-out of DIDMCA, coupled with the influx in recent “true lender” legislation, seem to show a coordinated effort to restrict bank-model lending.
Recently, Lead Bank and its loan servicer Hyphen, LLC, an online lending platform operating Helix Financial, filed a motion to dismiss a purported class action alleging violations of the Georgia Installment Loan Act (GILA) and Georgia racketeering law arising out of a consumer installment or “payday loan.” Specifically, the plaintiff alleged that the loan agreement between herself and Lead Bank was “nothing more than a façade, and a temporary one at that” in an attempt to evade Georgia’s restrictions on payday lending.
We are pleased to share our annual review of regulatory and legal developments in the consumer financial services industry. With active federal and state legislatures, consumer financial services providers faced a challenging 2023. Courts across the country issued rulings that will have immediate and lasting impacts on the industry. Our team of more than 140 professionals has prepared this concise, yet thorough analysis of the most important issues and trends throughout our industry. We not only examined what happened in 2023, but also what to expect — and how to prepare — for the months ahead.
On January 15, the American Arbitration Association (AAA) issued amended Mass Arbitration Supplementary Rules and new Consumer Mass Arbitration and Mediation Fee Schedules (collectively, the New Rules). The New Rules will apply to all mass arbitration cases filed on or after January 15, but not to any mass arbitrations filed prior to that date. The New Rules aim to reduce friction and enhance process efficiency. However, unless the New Rules are supplemented by a well-constructed pre-dispute arbitration agreement, they will not solve the principal problems posed by mass arbitrations.
On January 10, HB 254, entitled the True Lender Act, was introduced before the Maryland House of Delegates. The Act would amend the Maryland Commercial Law to add an article containing both predominant economic interest and totality of the circumstance tests to determine the “true lender” of a loan. A hearing on HB 254 is scheduled on January 23.
Washington now joins the list of states that have enacted or proposed legislation adopting so-called anti-evasion provisions, including legislation passed in Minnesota, discussed here, Connecticut, discussed here, Nebraska, discussed here, and proposed in Florida, discussed here. On December 5, HB 1874 was filed, which would amend the Washington Consumer Loan Act (CLA) to adopt both predominant economic interest and totality of the circumstance tests to determine the “true lender” of a loan under the CLA. It also takes aim at the use of voluntary tips, other gratuities or memberships and non-recourse loan programs.
On October 9, a Florida state senator introduced SB 146, which would add a new section to the Florida Consumer Finance Act (CFA), attempting to curb evasion of the CFA. SB 146 would treat all payments incident to the loan as interest, even if voluntary, and would adopt both predominant economic interest and totality of the circumstance tests for true lender purposes. SB 146 follows other states’ attempts to address true lender issues, including legislation passed in Minnesota, discussed here, and Connecticut, discussed here.
A California state court recently denied a preliminary injunction sought by the California Department of Financial Protection and Innovation (the DFPI) in its long-running litigation against Opportunity Financial (OppFi) contending that OppFi is the “true lender,” and therefore subject to usury limits, on loans originated by OppFi’s bank partner. The court found that on the factual record before it that the DFPI had not shown a reasonable probability of prevailing on the merits of its claim.