NAFSA’s 2017 Year in Law Review
2017 proved to be a busy year for financial services, and as the only Native trade association fully dedicated to advocating for tribal lending, NAFSA looked to keep pace with the ever-changing regulatory and policy landscape around consumer finance.
Here is a quick review of the major news surrounding consumer finance law from the past year:
PHH v. CFPB
Perhaps the biggest legal saga in consumer finance in 2017 was the debate in the DC Circuit Court over the structure of the Consumer Financial Protection Bureau (CFPB), the federal agency created in the wake of the Great Recession to tighten financial regulation and step up enforcement against bad actors. PHH Corporation, a mortgage lender, challenged the imposition of fines for violations of the Real Estate Settlement Procedures Act made unilaterally by the CFPB’s director, Richard Cordray, after the statute of limitations had run out.
Back in late 2016, a three-judge panel from the DC Circuit ruled the structure of the CFPB was unconstitutional and a “threat to individual liberty.” The panel explained, “the CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision making and abuse of power.”
Shortly thereafter, the DC Circuit agreed to rehear the case en banc before the entire of cadre of judges at the court. The U.S. Department of Justice (DOJ) would later submit a brief to circuit court supporting the original decision by the panel. In what appeared to be an unusual move, the Trump Administration abandoned the position of a federal agency while the agency’s own constitutionality was in question.
The en banc collection of circuit court judges reheard the arguments in the case in May. While the CFPB maintained that its single director structure was lawful and should remain in tact, PHH took the position that the Bureau should be abolished in its entirety. The en banc group appeared mostly divided during oral arguments.
The en banc DC Circuit has yet to render a decision after the May hearing. This has not stopped other companies currently embroiled in litigation with the CFPB from also challenging the consumer watchdog’s constitutionality in other courts. In some instances, the DOJ has even lent support to those arguing against the constitutionality of the Bureau.
As Congressional Republicans seek creative ways to bring accountability and oversight to the CFPB, many in the legal field anxiously await the en banc decision of the DC Circuit.
Great Plains Lending, et. al. v. CFPB
The highest profile case involving tribal lending was almost elevated to the justices of the U.S. Supreme Court in 2017. The impact of the high court’s refusal to hear the case has yet to be felt, but could begin to play out in jurisdictions throughout the United States.
In Great Plains Lending, et. al. v. CFPB, the Ninth Circuit held that the agency possesses the authority to issue civil investigative demands (CIDs) to tribes. Laws of general applicability, like the Consumer Financial Protection Act (CFP Act) that gives the CFPB its CID powers, are not typically applicable to tribes absent express provisions by Congress. However, the Ninth Circuit turned this common approach to jurisprudence on its head and said laws of general applicability apply to tribes absent a few narrow exemptions.
According to the CFP Act, the CFPB has authority to regulate “covered persons.” The Bureau argued that tribes and their sovereign lending arms were covered persons, despite the explicit inclusion of tribes in the definition for “state.”
After the Ninth Circuit refused an en banc rehearing of its decision, the tribal lending entities (TLEs) petitioned the Supreme Court to review their case. NAFSA submitted an amicus brief to the Supreme Court highlighting for the justices the positive impact the tribal online lending industry is having on Indian Country, and to further inform the Court of the many barriers tribes must overcome in order to build their economies.
The TLEs’ petition for review to the Supreme Court was ultimately denied, leaving the Ninth Circuit’s ruling to stand in that jurisdiction. The circuit court’s decision will now govern the CFPB’s CID authority with tribes in the Ninth Circuit. However, while the actual holding of this case is specific to that issue, the opinion issued by the Court contains a significant amount of dicta that could easily be persuasive to other courts (and certainly the Ninth Circuit) to extend this logic in a subsequent case to hold that tribes are in fact fully subject to the CFP Act.
Golden Valley Lending, et. al. v. CFPB
Another significant lawsuit by the CFPB to rock Indian Country came when the agency sued four TLEs owned by the Upper Lake tribe for unfair, deceptive, and abusive acts and practices (UDAAP) stemming from alleged violations of state usury and licensing laws.
Ignoring hundreds of years of Supreme Court precedent, the CFPB demonstrated it was willing to impose state law on a sovereign tribal business through the guise of an amorphous federal statute. The CFPB is attempting to impose state jurisdiction over a sovereign economic subdivision of a federally-recognized tribe in an area that Congress has expressly prohibited the agency from participating. The Bureau’s use of UDAAP creates a de facto state jurisdiction over sovereign tribal affairs and contradicts decades of Supreme Court precedent and explicit Congressional action.
After a recent motion to transfer venue in the case to Kansas was granted, NAFSA submitted an amicus brief to the District Court in Kansas supporting the TLEs’ motion to dismiss the case. The CFPB’s actions against the TLEs of the Upper Lake tribe are in direct conflict with NAFSA’s mission, the Supreme Court, and the intent of Congress, threatening tribal sovereignty and imperiling the future of tribal lending in the process.
FinTech Charter Suits
The Office of the Comptroller of the Currency’s (OCC) announcement that it was pursuing the issuance of special purpose bank charters for fintech companies was met with praise by many cutting edge providers in financial services, but was also met with derision and litigation by state regulators that felt the federal body was encroaching on state turf.
Depending on the jurisdiction, lenders are regulated by a collection of state, federal, and tribal laws. If an institution were to secure a FinTech charter from the OCC, it would exempt that company from state regulation and bring it under the federal regulatory umbrella.
The Conference of State Bank Supervisors (CSBS), the association of state financial regulators, was first to challenge the OCC’s FinTech charter system. In its complaint, the CSBS voiced concerns over the proposed charters’ effect on enforcement of state consumer protection laws by establishing special purpose national banks out of fintech companies.
At the core of the dispute is whether or not the National Bank Act (NBA) applies to companies that perform some bank functions, like lending, but do not receive deposits. Former Comptroller Thomas Curry argued that the NBA grants the OCC authority to issue special bank charters to companies that engage in any aspect of banking. The CSBS asked the court to declare that the OCC lacks the power to issue charters to non-deposit receiving financial institutions.
Soon thereafter, CSBS developed its own alternative for the FinTech charters, dubbed Vision 2020. The initiative seeks to standardize state regulatory systems and develop a data sharing accord that helps states maintain up to date information to craft new rules. The vision includes components for a multistate licensing system and industry advisory panel. The hope is that the new measures will aid state regulators in keeping current with new technological breakthroughs and ease the ability of banks to provide services to non-banks.
The New York Department of Financial Services (NYDFS) followed suit a few months later when it also filed suit against the OCC. That suit was recently dismissed as speculative, considering the OCC has not yet finalized the FinTech charter program.
Other Important Legal Developments
2017 saw other important legal developments as well, especially in the areas of payday lending and tribal sovereign immunity.
Three payday lending operators tenuously associated with Indian Country suffered heavy defeats this past year. Western Sky, a once dominant small dollar lender operated by a private tribal citizen, was reduced to suing its former attorneys that allegedly developed a scheme to originate loans with the tribal lender and immediately sell them off to a non-Native operator halfway across the country. That non-Native operator, CashCall, is now being sued for $287 million in restitution to consumers by the CFPB.
Scott Tucker, former race car driver and payday lending mogul, was convicted, along with his attorney, Timothy Muir, on 14 counts of fraud, money laundering, conspiracy, and racketeering in connection with his rent-a-tribe scheme.
To skirt state loan interest caps, Tucker entered into agreements with three federally-recognized tribes- the Miami Tribe of Oklahoma, Santee Sioux of Nebraska, and Modoc Tribe of Oklahoma. In exchange for one percent of the profits from the payday lending operations, the tribes agreed to provide Tucker’s businesses with sovereign immunity.
The Tucker trial included many startling revelations about the lengths Tucker and Muir would go to maintain the illusion that the tribes operated the lending entities. Muir reluctantly acceded that he fraudulently signed a legal document with “J.S. Ragman” (a Vietnam era slang term for a disheveled soldier, Joe Shit the Ragman) in a $30 million settlement.
Tucker’s former mentor and business partner, Charles Hallinan, also found himself in legal trouble for a similar attempt to defraud consumers and game the sovereign status of a tribe. Like Tucker, Hallinan funnelled his payday loan business through shell businesses he helped organize through tribal governments. Hallinan installed a server at tribal offices in California where loan applications were supposedly being processed. In actuality, the server was connected to nothing, and everything was handled from Hallinan’s central offices on the east coast.
As one tribal business representative testified when Hallinan’s deceit became clear, the tribe ended its relationship with him. Hallinan later wrote in an email to his attorney: “if these guys are serious about their responsibilities, then we’re dealing with the wrong tribe.”
The convictions of Tucker, Muir, and Hallinan likely put to rest a business model that threatened the utilization of tribal sovereignty by legitimate tribally-owned businesses. In stark contrast to Tucker and Hallinan, NAFSA members consistently exercised their legitimate sovereign authority through tribal lending in 2017, reinforcing the importance of tribal control over lending operations and finances.
2018 is expected to bring new challenges and opportunities in tribal lending. NAFSA will continue to keep its members and industry up to date on all of the impacts.
