Death by a Thousand Cuts: Update on
By Catherine M. Brennan, Justin B. Hosie, K. Dailey Wilson, and
Erica A.N. Kramer*
During the past year, small-dollar lenders continued to face increasing legal
and regulatory scrutiny at the state and federal level.1 One large lender blamed
increasing regulatory pressure as the leading reason for ceasing to offer payday
and title loans.2 This survey reviews some of the key investigation, enforcement,
litigation, legislation, and rulemaking developments since August 2014.
FEDERAL ENFORCEMENT ACTIONS
In May 2015, the Bureau of Consumer Financial Protection (“CFPB”) announced
the settlement of its enforcement action against PayPal, Inc. and its financing
subsidiary, Bill-Me-Later, Inc. (“PayPal”).3 In its complaint, the CFPB
took direct aim at PayPal’s credit product, PayPal Credit, formerly known as
Bill-Me-Later, which allows consumers to pay over time, for a fee, for online
and in-store purchases.4 The CFPB’s claims focused on advertising, enrollment
practices, payment processing, and payment allocation.5
The CFPB alleged that PayPal’s advertising was deceptive because PayPal repeatedly
offered promotional credit or money back, but did not honor the
* Catherine M. Brennan and Justin B. Hosie are partners at Hudson Cook, LLP. K. Dailey Wilson
and Erica A.N. Kramer are associates at Hudson Cook, LLP.
1. See Richard P. Eckman, Richard J. Zack, Christina O. Hud, Jonathan N. Ledsky & Scott J.
Helfand, Update on the Short-Term Lending Industry: Government Investigations and Enforcement Actions,
70 BUS. LAW. 657 (2015).
2. See Adam Rust, Fearing Regulatory Horizon EZCorp Says It Will Cease Consumer Lending, BANK
TALK (Aug. 4, 2015), http://banktalk.org/content/fearing-regulatory-horizon-ezcorp-says-it-willdrop-
3. Press Release, Consumer Fin. Prot. Bureau, CFPB Takes Action Against PayPal for Illegally Signing
Up Consumers for Unwanted Online Credit (May 19, 2015), http://www.consumerfinance.gov/
4. Complaint at 1, CFPB v. PayPal, Inc., No. 1:15-cv-01426 (D. Md. May 19, 2015), http://files.
offers.6 PayPal also allegedly enrolled some of its customers in PayPal Credit and
its electronic billing method without their knowledge or consent, simply because
those customers established a PayPal account.7 The CFPB asserted that this constituted
an unfair practice because it caused substantial injury to consumers that
they could not reasonably avoid.8 This injury included a credit report inquiry
that impacted consumers’ credit scores, as well as accrued interest and late
fees for failing to pay an account they did not know existed.9
Additionally, PayPal allegedly caused consumers to pay for purchases with
PayPal Credit even where they expressly sought to use a different payment
method.10 Once a PayPal Credit account was established, it allegedly became
the default payment method for all purchases, causing consumers to use the account
even though they intended to use another payment method, such as a
linked bank account.11 The CFPB also asserted that PayPal abusively applied
payment amounts in excess of the minimum payment to lower interest balances,
leaving higher interest balances to continue to accrue higher interest.12 The
CFPB asserted that consumers could not clearly understand how PayPal Credit
applied payments to deferred-interest promotions, and that it applied payments
in a way that consumers would not have chosen.13
To settle the lawsuit, PayPal agreed to pay $15 million to consumers who were
mistakenly enrolled in PayPal Credit, who mistakenly paid for a purchase with
PayPal Credit, or who incurred fees or deferred interest because of inadequate
disclosures and flawed customer-service practices.14 PayPal also agreed to improve
its consumer disclosures and to pay a $10 million fine.15
OTHER FEDERAL ENFORCEMENT ACTIONS
In January 2015, the Federal Trade Commission (“FTC”) announced enforcement
actions against two title lenders, First American Title Lending of Georgia,
LLC and Finance Select, Inc., based on allegedly deceptive advertising involving
introductory offers of a zero percent rate used to market their title loans.16 In a
decision in one of the enforcement actions, the FTC ordered the title lender to,
among other things, not state an introductory or temporary finance charge with-
6. Id. at 2.
8. Id. at 11–13.
9. Id. at 13–14.
10. Id. at 15.
14. Stipulated Final Judgment at 8, CFPB v. PayPal, Inc., No. 1:15-cv-01426 (D. Md. May 21,
15. Id. at 10.
16. Press Release, Fed. Trade Comm’n, In First FTC Cases Against Car Title Lenders, Companies
Settle Charges They Deceptively Advertised the Cost of Their Loans ( Jan. 30, 2015), https://www.ftc.
742 The Business Lawyer; Vol. 71, Spring 2016
out clearly and conspicuously disclosing the finance charge after the introductory
or temporary period ends.17
In February 2015, the FTC sued Payday Support Center, LLC, a debt relief
services provider, and related parties (“PSC”) for deceptive practices in violation
of the FTC Act and the Telemarketing Sales Rule.18 The FTC alleged that PSC
falsely represented that it would pay off, restructure, or eliminate consumers’
payday loans.19 The FTC also asserted that PSC fraudulently represented that
consumers’ creditors generally would cancel their payday loans after receiving
a form letter requesting “validation” of the loans and that their payments to
PSC would be applied to pay off their payday loans.20 The FTC also alleged
that PSC fraudulently claimed that its fee for services was only a small portion
of the consumers’ program payments to PSC.21 As of this writing, the case
was not resolved.
In July 2015, Adrian Rubin pleaded guilty to U.S. Department of Justice
(“DOJ”) charges that he conspired to evade state usury laws and other restrictions
on payday loans by engaging in deceptive business practices in violation
of the Racketeer Influenced and Corrupt Organizations Act (“RICO”).22 In its
press release announcing the charges, the DOJ claimed that Rubin violated
RICO and federal laws banning mail and wire fraud by paying a federally insured
bank, which was not subject to state laws, “to pretend that it was the payday
lender.”23 The DOJ also claimed that Rubin paid “an Indian tribe to pretend”
that it was the actual payday lender as part of a scheme to have the tribe
claim that “sovereign immunity” prevented application of state usury laws and
STATE ENFORCEMENT ACTIONS AND INVESTIGATIONS
In March 2015, the New York State Department of Financial Services
(“NYDFS”) entered into a consent order with Selling Source, LLC, a payday
loan lead generation business, and other defendants (“Selling Source”).25 Selling
17. In re First Am. Title Lending Co. of Ga., LLC, No. C-4529, slip op. at 3 (F.T.C. June 2, 2015),
https://www.ftc.gov/system/files/documents/cases/1506firstamericando.pdf; In re Fin. Select Inc. of
Ga., No. C-4528, slip op. at 3 (F.T.C. June 2, 2015), https://www.ftc.gov/system/files/documents/
18. Complaint at 1–2, FTC v. PSC Admin., LLC, No. 1:15-cv-00084 (S.D. Ala. Feb. 18, 2015),
19. Id. at 11.
21. Id. at 12.
22. See Press Release, U.S. Dep’t of Justice, RICO Conspiracy Charged in Payday Lending Case
( June 22, 2015), http://www.justice.gov/usao-edpa/pr/rico-conspiracy-charged-payday-lending-case
[hereinafter Rubin Press Release]; see also Information, United States v. Rubin, No. 2:15-cr-00238-
ER (E.D. Pa. June 9, 2015), http://www.justice.gov/usao-edpa/file/479826/download.
23. Rubin Press Release, supra note 22.
25. Consent Order In re Selling Source, LLC (N.Y. Dep’t of Fin. Servs. Mar. 9, 2015), http://www.
dfs.ny.gov/about/ea/ea150310.pdf [hereinafter Selling Source Consent Order]: see Press Release,
N.Y. Dep’t of Fin. Servs., NYFDS Announces MoneyMutual Will Pay $2.1 Million Penalty; Montel
Death by a Thousand Cuts: Update on Small-Dollar Lending 743
Source used celebrity Montel Williams to generate leads for payday loans and
allegedly represented to consumers that Montel Williams would not have endorsed
Selling Source “if it were not a legitimate company.”26
According to the consent order, Selling Source violated New York law by advertising
loans to New York consumers that exceeded the 16 percent cap on interest
for unlicensed non-bank lenders.27 NYDFS also took note of Selling
Source’s targeting of consumers for loan rollovers.28 To settle the enforcement
action, Selling Source agreed to pay a $2.1 million civil penalty.29 Selling Source
also agreed to withdraw from the New York market and to place a clear and conspicuous
statement on its websites indicating that payday loan referrals are “not
available in New York or to New York borrowers due to interest rate limits under
New York law.”30
In March 2015, the Virginia Attorney General launched a comprehensive effort
targeted at predatory lending.31 In July 2015, he filed a lawsuit against B&B
Pawnbrokers, Inc. for allegedly “making illegal, unlicensed motor vehicle title
loans, and for charging excessive fees.”32 The complaint sought restitution on behalf
of consumers, civil penalties, attorney’s fees, and injunctive relief.33
The Connecticut Department of Banking pursued action against a group of online
lenders organized under the laws of the Otoe-Missouria Tribe of Indians,34
alleging that they made usurious and unlicensed loans.35 The lenders allegedly
solicited business from Connecticut residents via mail, e-mail, and its website.36
The Department issued an administrative cease-and-desist order and ordered the
defendants to pay civil penalties and restitution.37 After failing to obtain dismissal
of the order, the defendants appealed the decision to Connecticut state court.38
Williams to Withdraw Endorsement for New York Payday Loans (Mar. 10, 2015), http://www.dfs.ny.
26. Selling Source Consent Order, supra note 25, at 6.
27. Id. at 5.
28. Id. at 7.
29. Id. at 8.
30. Id. at 11.
31. See Press Release, Va. Attorney Gen., Attorney General Herring Launching Effort to Combat
Predatory Lending (Mar. 26, 2015), http://www.oag.state.va.us/index.php/en/media-center/newsreleases/
32. See Press Release, Va. Attorney Gen., Attorney General Herring Sues Fredericksburg Pawnshop
for Illegal Loans ( July 21, 2015), http://www.oag.state.va.us/index.php/media-center/news-releases/
33. See Complaint, Virginia ex rel. Herring v. B&B Pawnbrokers, Inc., No. CL15003155-00 (Richmond
City Cir. Ct. July 21, 2015), http://ag.virginia.gov/files/BB_Pawnbrokers-Complaint.pdf.
34. Complaint, In re Great Plains Lending, LLC (Conn. Dep’t of Banking Oct. 24, 2014), http://
37. Id.; see Mark Paznoikas, Tribal Lenders Claim Right to Charge 448% on Loans in CT, CONN. MIRROR
(Apr. 3, 2015), http://ctmirror.org/2015/04/03/oklahoma-tribal-lenders-defy-ct-charge-448-onloans.
38. See Plaintiffs’ Brief at 1, Great Plains Lending, LLC v. Conn. Dep’t of Banking, No. HHB-CV15-
6028096-S (New Britain Super. Ct. Aug. 10, 2015), https://turtletalk.files.wordpress.com/2015/09/
744 The Business Lawyer; Vol. 71, Spring 2016
In November 2014, the Pennsylvania Attorney General issued a press release
announcing a consumer protection lawsuit against several Texas-based corporations,
alleging that they used an Indian tribe as a cover to provide payday loans,
which are illegal in Pennsylvania.39 The lawsuit sought injunctive relief, restitution,
civil penalties, and removal of negative credit reporting information from
affected consumers’ credit reports.40
Several states enacted legislation during the past year that made significant
changes to the laws that regulate small-dollar lending. Georgia House Bill 299,
effective May 6, 2015, applies to: loans made pursuant to the Georgia Industrial
Loan Act, retail installment and home solicitation sales under the Retail Installment
and Home Solicitation Sales Act, motor vehicle sales financing contracts
entered into pursuant to the Motor Vehicle Sales Finance Act, and insurance premium
finance agreements.41 The law permits a lender or merchant to collect a
nonrefundable convenience fee from any person who chooses to pay electronically.
42 The convenience fee must be in an amount equal to the actual cost borne
by the lender or merchant.43 However, the law permits an alternative, under
which a lender or merchant may impose a convenience fee that does not exceed
the average cost of the electronic payment method.44 Convenience fees are prohibited
unless a lender or merchant also provides a direct payment option by
check, cash, or money order.45 A convenience fee cannot be imposed for the direct
payment method.46 The new law also imposes notice requirements regarding
Indiana House Bill 1287 revises, effective July 1, 2015, the Indiana Code to
require that all those regularly engaging in making small loans to have a small
loan license.48 The newly revised statutory provision prohibits any person
from “regularly engaging” in making small loans, taking assignment of small
loans, or “undertaking the direct collection of payments from or the enforcement
of rights against debtors arising from small loans” without a license49 Those
39. Press Release, Pa. Attorney Gen., Attorney General Kane Files Lawsuit over Alleged Illegal Payday
Loan Scheme (Nov. 13, 2014), https://www.attorneygeneral.gov/Media_and_Resources/Press_
41. See GA. CODE ANN. § 13-1-15(e) (West, Westlaw current through end of 2015 Reg. Sess.).
42. Id. § 13-1-15.
43. Id. § 13-1-15(a)(1).
44. Id. § 13-1-15(a)(2), (b).
45. Id. § 13-1-15(c).
47. Id. § 13-1-15(d).
48. IND. CODE ANN. § 24-4.5-7-102 (West, Westlaw current through end of 2015 1st Reg. Sess.). A
person “regularly engages” in making small loans, taking assignment of small loans, or undertaking
the direct collection of payments of small loans if he or she either (a) performs any of the aforementioned
activities one time in the previous calendar year or (b) performs or will perform any of the
aforementioned activities one time in the current calendar year. Id. § 24-4.5-7-102(7).
49. Id. § 24-4.5-7-102(2).
Death by a Thousand Cuts: Update on Small-Dollar Lending 745
engaging in these activities as both small loan lenders and consumer lenders in
Indiana must obtain both the small loan license and the consumer loan license—
merely holding the consumer loan license will not be sufficient.50 Similar prohibitions
on making small-dollar loans were enacted in Connecticut and Oregon.51
The new Indiana law also prohibits lenders from imposing payment plan terms
that would require payments before the original maturity date of the outstanding
small loan.52 In addition, if a borrower is eligible for a payment plan and has not
entered into one, then the new limitations prohibit lenders from entering into a
new small loan with the borrower.53 Nevada Senate Bill 242, the Payday Lender
Best Practices Act, effective October 1, 2015,54 requires licensees under the
deferred deposit, high interest, and title loan provisions to adhere to eleven socalled
best practices.55 Those practices include disclosure requirements,56 procedural
requirements,57 and advertising notice requirements.58 The law also sets
forth several other provisions that mimic already existing requirements under
Through House Bill 644, effective January 1, 2016,60 New Hampshire completely
overhauled its statute that regulates small loans, payday loans, and title loans.61 For
example, the phrase “small loan” was revised to mean any title loan, payday loan,
open-end loan, or closed-end loan that is $10,000 or less with an annual percentage
rate of 10 percent or more.62 Certain fees are exempted from interest under this
definition of a small loan, including fees paid to a public official for filing or recording
and the reasonable costs and fees associated with the repossession and sale of a
South Dakota House Bill 1027, effective July 1, 2015,64 revised the South Dakota
Money Lending Licenses Act in several respects, including explicitly defining
the term “business of lending money.”65 Under existing South Dakota law,
50. Id. § 24-4.5-7-102(4).
51. See CONN. GEN. STAT. ANN. § 36a-573 (West, Westlaw current through end of 2015 Reg. Sess.
and June Special Sess.) (revising the statute to provide that any interest or charges received in excess
of that provided in the small loan provisions would render the loan void); OR. REV. STAT. ANN.
§ 725.045 (West, Westlaw current with 2015 Reg. Sess. legis. eff. through Oct. 5, 2015) (providing
that any consumer finance loans of $50,000 or less made without a license are null and void).
52. IND. CODE ANN. § 24-4.5-7-401(3)(g) (West, Westlaw current through end of 2015 1st Reg. Sess.).
53. Id. § 24-4.5-7-401(3)(g).
54. S. 242, 78th Leg. Sess. (Nev. 2015).
56. Id. § 4.
57. Id. § 7.
59. Id. §§ 8–10.
60. H.R. 644, 2015 Sess. (N.H. 2015), http://www.gencourt.state.nh.us/bill_status/bill_docket.
61. N.H. REV. STAT. ANN. §§ 399-A:1 to A:20 (West, Westlaw current through Chapter 275 (End)
of the 2015 Reg. Sess.).
62. Id. § 399-A:1(XX).
64. See 2015 S.D. Sess. Laws ch. 242, § 1.
65. S.D. CODIFIED LAWS § 54-4-40 (West, Westlaw current through end of 2015 Reg. Sess., Exec.
Order 15-1, Sup. Ct. R. 15-16).
746 The Business Lawyer; Vol. 71, Spring 2016
any person that engages in the business of lending money is required to have a
money lender’s license.66 The term business of lending money now includes
“originating, selling, servicing, acquiring, or purchasing loans, or servicing, acquiring,
or purchasing retail installment contracts.”67
CFPB PROPOSAL FOR SMALL-DOLLAR LENDING RULEMAKING
Pursuant to the consultation process required by the Small Business Regulatory
Enforcement Fairness Act,68 the CFPB announced in March 2015 that it
is considering proposing rules covering several types of small-dollar lending:
payday loans; deposit advance products; vehicle title loans; installment loans
with an “all-in” annual percentage rate above 36 percent per year involving either
an account access device, e.g., checks, automated clearinghouse authorizations,
or a vehicle title as security; and open-end lines of credit.69 The proposal does
not cover non-recourse pawn transactions involving taking possession of the
pawned item, rather than taking possession of the title.70 The proposal also excludes
credit card accounts, real estate secured loans, student loans, and deposit
account overdraft services.71
The proposal under consideration includes prevention and protection requirements.
72 Under the prevention requirements, consumers would be required to
prove an ability to repay before entering a covered transaction.73 Under the protection
requirements, various restrictions would limit the specific terms of transactions
without an ability-to-repay requirement.74
The proposal will also delineate between short-term credit and long-term
credit.75 Short-term credit covered by the proposal will involve transactions
with a term of forty-five days or less, and such transactions would be governed
by either an ability-to-repay requirement or an alternative set of requirements.76
Long-term credit transactions are those with terms over forty-five days involving
an all-in annual percentage rate77 above 36 percent that include either an
67. Id. § 54-4-36(1).
68. See 5 U.S.C. § 609 (2012).
69. CONSUMER FIN. PROT. BUREAU, SMALL BUSINESS ADVISORY REVIEW PANEL FOR POTENTIAL RULEMAKINGS
FOR PAYDAY, VEHICLE TITLE, AND SIMILAR LOANS: OUTLINE OF PROPOSALS UNDER CONSIDERATION AND ALTERNATIVES
CONSIDERED (Mar. 26, 2015) [hereinafter CFPB OUTLINE], http://files.consumerfinance.gov/f/
70. Id. at 7.
72. Consumer Fin. Prot. Bureau, Factsheet: The CFPB Considers Proposal to End Payday Debt
Traps 1 (Mar. 26, 2015), http://files.consumerfinance.gov/f/201503_cfpb-proposal-under-considera
73. See CFPB OUTLINE, supra note 69, at 11–13, 22–23.
74. Id. at 16, 26–27.
75. Id. at 7, 19.
76. Id. at 7.
77. The CFPB Outline states that the CFPB is “considering using an annualized cost of credit measure
that would include interest, fees, and the cost of ancillary products such as credit insurance,
memberships, and other products sold along with the credit. One possible measure is the military
annual percentage rate defined in 32 CFR 232.” Id. at 7 n.10.
Death by a Thousand Cuts: Update on Small-Dollar Lending 747
account access device or a vehicle title as security.78 Like the short-term transactions,
long-term transactions would be governed by either an ability-torepay
requirement or an alternative set of requirements.79 The proposals
under consideration would also impose collection, recordkeeping, and procedural
requirements on all credit types.80
The proposal states that the CFPB believes that these restrictions would lead to
a substantial reduction in the volume of covered loans and fees generated.81 Noting
“a number of sources of uncertainty”82 and that its figures “should not be
taken as lower or upper bounds on the impact”83 of the proposal, the CFPB
nonetheless predicted that storefront short-term payday loan volume would
fall by 69 percent to 84 percent.84 No similar prediction was made for shortterm
title loan volume or for installment lending volume.
78. Id. at 19–20.
80. Id. at 28–31.
81. Id. at 40.
82. Id. at 41.
83. Id. at 43.
748 The Business Lawyer; Vol. 71, Spring 2016