CFPB Targets Pension Lenders in Dodd-Frank Suit
On August 20, 2015, the Consumer Financial Protection Bureau (CFPB) and New York Department of Financial Services (NYDFS) filed suit in the U.S. District Court for the Central District of California against two pension lenders and their individual managers for allegedly deceiving consumers about the costs and risks of their pension advance loans. A pension advance is a type of loan in which the lender offers the pensioner a lump sum payment in return for an assignment of all or some of the pensioner’s monthly pension checks over a specified period of time.
The complaint alleges that the defendants, in violation of the Dodd-Frank Act, deceived consumers, and notably veterans, concerning the costs and risks associated with the pension advances. Specifically, the complaint alleges that the defendants misrepresented the pension advances as a product for sale and not a loan, leaving consumers unaware of the risks associated with these transactions. Further, the complaint alleges that the defendants either failed to disclose or actually misrepresented the interest rates for the loans. According to the CFPB, in some instances the defendants advised that the advance was better than a home equity line of credit or credit card because of lower interest rates and fees. According to the regulators, however, the effective interest rate was often greater than 28 percent, which is higher than most credit card and home equity line rates. Finally, the complaint contains allegations that the defendants violated New York state usury laws based on the effective rates.
Allegedly, the defendants also required customers to grant them powers of attorney to establish bank accounts in their names and to perform routine transactions although they had no license to do so from NYDFS. In further disregard for their lack of authority, the defendants pursued customers who defaulted, often filing legal actions, appearing as creditors in a customer’s bankruptcy proceedings, and levying on judgments obtained on the customer’s properties.
The complaint also draws attention to the fact that the defendants solicited investors over Internet websites to invest in the transactions and paid investors from pension payments deposited into the consumer accounts. Thus, NYDFS additionally alleges that by transmitting money from consumers’ accounts to investors, the defendants were engaged in the business of transmitting money in violation of New York banking laws, which generally require a license for that type of activity.
While the lawsuit has only begun to take shape, it was brought following an investigation by federal and state authorities dating to 2011. It likely portends future scrutiny of the growing pension advance industry by the CFPB, and reflects the CFPB’s focus on alleged deceptive practices targeting veterans. The case also makes clear the CFPB’s position that pension advance loans must be unambiguously advertised as loans, rather than sales, and pension advance companies must ensure their interest rate regimes comply with both federal and applicable state standards.