In a putative nationwide consumer class action against an online marketplace lender and its bank partner, Bethune v. LendingClub Corp., et al., a federal judge in the Southern District of New York recently granted defendants' motion to compel arbitration and bar class action litigation.
Plaintiff, a New York resident, alleged that he received a private consumer loan from LendingClub Corporation (LendingClub) in June 2015 at 29.97% interest, in excess of New York's 16% usury limit. He filed his class action lawsuit on behalf of similarly situated New Yorkers, as well as all U.S. persons or entities who received loans from defendants at interest rates in excess of their state's usury limit.
The Complaint alleged that LendingClub used a "sham" bank partnership with WebBank – which is chartered in Utah where there is no usury law – to evade the usury limits of borrowers' home states. Specifically, plaintiff alleged that LendingClub performed traditional lending functions, including solicitation and loan underwriting, but then caused WebBank to fund the loans, only to transfer them to LendingClub two days later.
The Complaint also demanded a jury trial. Defendants, however, moved to compel arbitration and bar the class claims based on an arbitration provision and class action waiver in plaintiff's loan contracts with LendingClub and WebBank. Plaintiff could have opted out of the arbitration provision within 30 days after accepting the agreement, but he did not exercise that right.
Rather, in court he argued that the arbitration provision was "unconscionable" because it sought to enforce the laws of Utah (not New York, plaintiff's state of residence), and to evade the usury protections available under New York law. Ultimately, Judge Naomi Reice Buchwald concluded that because plaintiff was really challenging the choice-of-law provision for the entire contract (rather than the arbitration provision in particular), an arbitrator (not the Court) must determine the validity of the contract and arbitrability of the dispute. The Court further enforced the contract's class action waiver providing that "no arbitration shall proceed on a class, representative, or collective basis."
Bethune is important for two main reasons. First, it demonstrates that arbitration clauses remain a powerful tool to avoid public litigation and potentially reduce litigation costs. Second, it illustrates the impact that the CFPB's proposed arbitration rule will have if finalized and if it withstands legal and legislative challenges.
Under the proposed rule, lenders will not be able to rely on borrowers' failure to exercise an arbitration opt-out provision, as defendants did in Bethune. That is because the proposed rule prohibits lenders from using arbitration clauses to bar consumers from filing or participating in class actions.
The comment period on the proposed arbitration rule closed on August 22, 2016. If the rule is finalized, compliance will be required within 211 days of final publication. However, it is unclear when, or even if, the CFPB will finalize the rule for various reasons, including resolution of CFPB v. PHH Corp. which is pending en banc review before the D.C. Circuit. In addition, the Congressional Review Act may allow Congressional Republicans to nullify a final arbitration rule, and prevent reissuance unless authorized by a newly enacted law.
Regardless of whether the CFPB's proposed arbitration rule is ultimately finalized, lenders must remain mindful of what consumer arbitration clauses cannot do: protect against government enforcement actions. Two recent matters involving "true lender" allegations like Bethune are illustrative.
The Georgia Attorney General announced this month a $40 million settlement with online payday lender CashCall, Inc. and affiliated parties. The Attorney General had alleged that defendants charged Georgians unlawfully high interest rates, and that the true lender was not entitled to tribal immunity from state law prohibitions on usurious lending. In another matter, the Pennsylvania Attorney General recently defeated the motion to dismiss and bank preemption defense of online payday lender Think Finance, Inc. See Commonwealth of Pennsylvania v. Think Finance, Inc. (E.D.Pa.). The court held that the Attorney General sufficiently alleged that Think Finance, Inc., and not its bank partner, was the "true lender."
Online lenders and bank partners must take care to structure their relationships with regard for "true lender" enforcement risk. See here for more analysis on "true lender" issues and stay tuned for additional coverage of the CFPB's proposed arbitration rule.