Online lending in the consumer sector involves the use of mobile devices by consumers to apply for loans, as well as the approval and funding of such loans to consumers. This article focuses on loans made to consumers and examines how the consumer regulations have been expanded to apply to substantially all lenders (not just banks). Since 1968, in tandem with the growth of financial services provided to consumers, over 20 separate consumer lending regulations were enacted.
In 2010, the enactment of The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) significantly expanded consumer financial protection regulations and broadened the scope of such regulations to cover all parties that provide credit to consumers. Consumer laws pertaining to accurate disclosure of credit terms to consumers were consolidated under Federal Reserve Regulations M1 and Z2. Consumer laws pertaining to access and use of credit reports were consolidated under Regulation V3. Other Federal Reserve regulations that apply to lending transactions with consumers include Regulation B4 (implementing the Equal Credit Opportunity Act), as well as the Payday Lending Regulations5.
The consumer regulations promulgated by the Federal Trade Commission (“FTC”) with respect to unfair, deceptive, or abusive acts and practices (“UDAAP”) were not restated in the Federal Reserve Regulations, but the Consumer Finance Protection Board (the “CFPB”) published additional interpretations regarding UDAAP.
Effective with the passage of Dodd Frank, all consumer-related regulations are enforceable solely by the CFPB. While the sheer number of regulations is overwhelming, compliance has become easier since the formation of the CFPB, largely because the CFPB provides a centralized location where all consumer lending regulations can be found and has created model forms that can be adapted and used to facilitate and execute most consumer lending activities.
It should be noted that federal consumer regulations do not unilaterally preempt corresponding state consumer regulations in all circumstances. However, in the context of bank lending, federal consumer regulations preempt the corresponding state-level regulations to the extent that state law is more lenient than the corresponding federal law6. Note that this blanket preemption applies only in connection with consumer loans made by federally regulated banks. To date, the preemption has not been extended to cover non-bank lenders. Consequently, non-bank lenders must comply with state laws in cases where state and federal requirements conflict as they cannot rely on federal preemption of state laws as a defense to any failure to comply with a particular state’s requirements.
Individual states also have usury laws that impact consumer lending. The impact of state usury laws was considered in the case of Madden v. Midland Funding7, which involved a usury claims against Midland Funding, which had purchased credit card debt from FIA Card Services NA, a national bank with its principal office in Delaware. When Midland attempted to collect on that debt, the debtor, Madden, sued, alleging that Midland’s efforts violated the Fair Debt Collection Practices Act and New York law (the domicile of Madden) because Midland was attempting to collect amounts it was not owed as the interest charged was usurious. The Southern District of New York initially issued a ruling that supported federal preemption, but that ruling was reversed on appeal by the Second Circuit (786 F.3d 246 (2015)), and the U.S. Supreme Court denied certiorari. The case was settled in March of 2019.
The opinion issued by the Second Circuit appeared to overrule the doctrine of “valid when made”, meaning that if a contract is not usurious when it is made, the assignment by the lender to a lender in another state (which has a lower usury threshold) does not render the contract usurious. The opinion, if applied widely, would have impaired the ability of banks and other lenders to “securitize” their loans, potentially impairing bank liquidity nationwide.
The Madden case has been widely criticized. In the bankruptcy case of Rent-Rite Superkegs West, Ltd.8, the U.S. Bankruptcy Court for the District of Colorado criticized the Second Circuit’s reasoning and followed the “valid when made” doctrine. Amicus briefs were filed by the Federal Deposit Insurance Corporation (the “FDIC”) and the Office of the Comptroller of Currency (the “OCC”) supporting the application of the “valid when made” doctrine. If and when the Protecting Consumers’ Access to Credit Act of 2017 is adopted, the “valid when made” doctrine will be law.
In summary, the regulations issued by the Board of Governors of the Federal Reserve Bank and the CFPB apply to all consumer lending transactions. At the state level, if the lender is a federally chartered bank, a majority (but not all) of the state-based consumer regulations will be preempted by the federal regulations, particularly where the federal regulations are more stringent. In cases where the lender is not a federally chartered bank, state consumer regulations may not be fully preempted, requiring a review of applicable state and federal regulations.
1 12 CFR Part 1013
2 12 CFR Part 1026
3 12CFR Part 1022
4 12 CFR Part 1002
5 12 CFR Part 1041
6 12 USC §25
7 11-CV-8149(CS), Feb. 27, 2017
8 2019 WL 2179688 (US Bankr. Court D. Colo. May 2019)