The Consumer Financial Protection Bureau (CFPB) filed a complaint in the U.S. District Court for the Southern District of New York on July 31 against various companies for allegedly originating, servicing and collecting payday loans that were void in whole or in part under state law in 17 states, including New York.
In its complaint, the CFPB alleges that the defendants committed unfair and deceptive acts under the Dodd-Frank Act’s prohibition against “unfair, deceptive or abusive acts of practices” (UDAAP) by “deceiv[ing] consumers into believing that federal and state laws do not apply to the defendants or the loans” and by “us[ing] various unfair and deceptive tactics in securing repayment of the payday loans.”
The CFPB also alleged that the defendants used illegal wage-assignment clauses in their loan agreements.
The defendants listed included NDG Financial Corp., Northway Financial Corp., Ltd., Northway Broker, Ltd., E-Care Contact Centers, Ltd., Blizzard Interactive Corp., Sagewood Holdings, Ltd., New World Consolidated Lending Corp., New World Lenders Corp., Payroll Loans First Lenders Corp., and New World RRSP Lenders Corp.
All of the defendants except Northway Financial Corp. Ltd. and Northway Broker, Ltd. are Canadian corporations. Northway Financial Corp. Ltd. and Northway Broker, Ltd. are incorporated in Malta. Sagewood Holdings, Ltd. owns a majority interest in NDG Financial Corp., which owns all of the other defendants.
The CFPB stated within its complaint that it has subject-matter jurisdiction because the complaint is being brought under federal consumer financial law by a U.S. agency and presents a federal question. The complaint added that the New York venue is proper because a “substantial part of the events or omissions giving rise to the claims occurred here and defendants do business here.”
In January 2014, the U.S. Supreme Court addressed the issue of jurisdiction over foreign corporations in Daimler AG v. Bauman et al. In that opinion, the Supreme Court stated that “the lodestar of our personal jurisdiction jurisprudence” is that “a state may subject a defendant to the burden of suit if the defendant has sufficiently taken advantage of the state’s laws and protections through its contacts in the state; whether the defendant has contacts elsewhere is immaterial.”
Referring to Goodyear Dunlop Tires Operations, S.A. v. Brown, the Supreme Court added that the inquiry for jurisdiction of foreign corporations is “not whether a foreign corporation’s in-forum contacts can be said to be in some sense ‘continuous and systematic,’ it is whether that corporation’s ‘affiliations with the state’ are so ‘continuous and systematic’ as to render [it] essentially at home in the forum State.”
The CFPB found that since at least July 21, 2011, NDG Financial has extended payday loans exclusively over the Internet to consumers in all 50 states of the United States through its network of wholly owned subsidiaries.
The websites used to provide the loans had servers that had been physically housed with Canadian and U.S.-based telecommunications companies.
“The NDG Enterprise uses U.S.-based banks, payment processors and money transmitters to transfer funds to and from U.S. consumers, typically through Automated Clearing House (ACH) credit and debit entries,” the complaint stated. “In order to disburse funds to and collect funds from U.S. consumers through the ACH network, NDG Financial and E-Care employees established and maintained accounts with several U.S.-based originating depository financial institutions, third party payment processors, and money services transmitters in Northway’s name.”
Through its collection practices, the complaint alleges, the defendants “falsely represented to consumers that non-payment of debt would result in lawsuit, arrest, imprisonment or wage garnishment, despite lacking the intention or legal authority to take such actions.”
Some of the loan agreements issued by the defendants expressly claimed that Northway and Northway Broker were not subject to any laws of the U.S. federal government or any state. The loan agreements also asserted that U.S. federal and state laws did not apply to Northway and Northway Broker, the consumer’s account or to the terms of the loan agreement. In response to consumers that contacted defendants to report a complaint, dispute a charge or request reimbursement, defendants asserted that the consumers’ state laws did not apply.
“For example, defendants frequently sent a form letter to complaining consumers, which stated: If you take a moment to review the attached loan agreement, you will see that Northway Financial Corporation Ltd. is a Financial Institution licensed and regulated in accordance with the European Union (EU) Directives. As such, the laws of the Republic of Malta (member State of the European Union), not the state of [consumer’s state of residence] applies to its terms. We provided you with this notice so that you would understand the terms of your loan.”
Contrary to what the defendants told their consumers, in an application filed with a U.S. bank to process ACH transactions, the company acknowledged that it was subject to U.S. federal law.
According to the complaint: “The [defendants] underwent annual external audits of its financial statements by an independent accounting firm. These external audits placed the [defendants] on notice that its payday lending operations were subject to U.S. federal and state law. The 2010 audit report stated that (1) the [defendants were] subject to extensive regulation in the jurisdictions in which it operated; (2) there was a risk that regulatory authorities in those jurisdictions would apply specific lending legislation on loans issued to borrowers residing in those jurisdictions; (3) there was a risk that the [defendants were] violating specific loan legislation in the borrowers’ jurisdictions; and (4) that the interest rates on [defendants] loans would exceed the maximum permissible rate of interest in some borrowers’ jurisdictions, thus making the borrowers’ obligations legally unenforceable. According to the audit, the [defendants] informed the auditor that it conducted business in accordance with the applicable laws of the respective jurisdictions.”
In response to hundreds of complaints against Northway for alleged violations of consumer protection laws, several states – including Michigan, California, Virginia, New Hampshire, Maine, Oregon and Pennsylvania – have issued cease-and-desist orders to Northway, directing it to stop extending unlicensed loans that do not comply with various state consumer lending law protections.
In some instances, after receiving the cease and desist orders, the defendants continued to originate, service or collect loans in those states, according to the CFPB’s complaint.