Last Week, This Morning

March 3, 2025

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an "Amicus Brief(ly)¹" comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters - CARLAW, HouseLaw, InstallmentLaw, PrivacyLaw, and BizFinLaw - provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or mwiller@counselorlibrary.com.

On February 24, the Federal Deposit Insurance Corporation withdrew its amicus curiae brief in the lawsuit filed in March 2024 by three trade groups - the American Fintech Council, the American Financial Services Association, and the National Association of Industrial Bankers - against the Colorado attorney general and the administrator of the Colorado Uniform Consumer Credit Code, alleging that the Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDMCA") opt-out bill Colorado enacted in 2023 is invalid.

In June 2023, Colorado became the second state to opt out of Section 521 of the DIDMCA. Congress passed the DIDMCA to, among other things, allow state-chartered banks to lend nationwide at rates up to the higher of their home state's interest-rate cap or a federal interest-rate cap. By opting out, a state could impose its own interest-rate cap, although it could only impose such a rate cap on loans "made in" the opting-out state.

In June 2024, a Colorado federal district court granted the plaintiffs' motion for a preliminary injunction. The preliminary injunction enjoined Colorado from "enforcing the interest rates in the Colorado [Uniform Consumer Credit Code] with respect to any loan made by the plaintiffs' members, to the extent that the loan is not 'made in' Colorado and the applicable interest rate in Section 1831d(a) exceeds the rate that would otherwise be permitted." The trade group plaintiffs argued that Colorado's interpretation of "made in" was too broad. The plaintiffs contended that the determination of where a loan is "made" should be based on where the bank is located and performs its non-ministerial functions. Conversely, the state of Colorado argued that a loan is "made in" both the state where the bank enters into the transaction and the state where the borrower enters into the transaction. The court reviewed the statutory text of the opt-out provision and found that the plaintiffs' view is more consistent with the ordinary colloquial understanding of who "makes" a loan. (The bank "makes" a loan while the borrowers "obtain" or "receive" a loan.) The court also found that the plaintiffs' view is more consistent with how the words "make" and "made" are used in the Federal Deposit Insurance Act and the sections of the U.S. Code that govern "Banks and Banking."

Amicus Brief(ly): The FDIC's withdrawal from the Colorado case is consistent with recent federal actions to remove the agencies from litigation. In this case, the FDIC had supported Colorado's attempt to extend its interest rate limitations to loans made by lenders in other states to consumers in Colorado. The impact of the FDIC's withdrawal may not be too dramatic (if its involvement was ever going to have a dramatic impact) in light of the U.S. Supreme Court's Loper-Bright opinion that overturned Chevron v. NRDC, the case where the Supreme Court created the doctrine that instructed courts to defer to an agency's interpretation of federal statutes under its purview. Colorado's appeal of the preliminary injunction to the Tenth Circuit is still pending, with both sides dug in on their relative positions about how Colorado's opt out of Section 521 should operate.

On February 21, the Consumer Financial Protection Bureau dismissed with prejudice a lawsuit it filed in May 2024 in the U.S. District Court for the Central District of California against a financial technology company that operates a peer-to-peer lending platform, alleging violations of the Consumer Financial Protection Act and the Fair Credit Reporting Act. Specifically, the CFPB alleged that the company all but requires consumers to pay fees styled as "tips" or "donations," which result in a high cost of borrowing that is not properly disclosed or avoidable. The CFPB alleged that the company engaged in deceptive practices when it misrepresented certain terms about the total cost of credit in its loan disclosure documents. Additionally, the CFPB alleged that the company engaged in unfair and deceptive practices when it serviced and collected on loans that were void or uncollectible because the loans were made without required state licenses or in excess of state usury caps. Finally, the CFPB alleged that the company coerced payments by threatening to provide negative credit information to credit reporting agencies, even though the company did not actually engage in credit reporting.

Amicus Brief(ly): Consistent with the FDIC withdrawal from the Colorado DIDMCA case and the directives from Acting CFPB Director Vought, the dismissal of the CFPB's lawsuit challenging aspects of this peer-to-peer lender's program reflects the new administration's reset of the government's litigation position in a number of financial services cases. This case, on which we reported in these pages last May, had a chance to reveal how the courts would react to the company's innovative product that, by design, did not fit into existing definitions of "credit" or "loan." Given the CFPB's zeal for its consumer protection mission under Rohit Chopra, its position as a plaintiff in this case was sort of predictable. California settled a case with this provider in 2023 in which the state alleged that the provider was operating without a required lending license, and Pennsylvania settled a case with this provider in 2024 with a consent order effectively requiring the provider to re-work its program to comply with state lending laws. So, we know what at least a couple of states think about how the provider's model works under state law (i.e., for the regulators, it doesn't - the provider cannot call payments incident to the "loan" a tip or donation; they are "interest," and the product is a "loan"). Given the CFPB's dismissal, other states may also take an interest in the provider's model.

The Court of Appeals of Wisconsin recently held that the National Bank Act does not preempt the Wisconsin Consumer Act's requirement that a creditor provide a Notice of Right to Cure Default to a consumer before bringing a collection action against that consumer.

In this case, a consumer defaulted on two credit card accounts with a national bank. The national bank brought actions against the consumer to collect the unpaid balances on those cards but did not provide the consumer with a Notice of Right to Cure Default under the WCA before filing the collection actions. The WCA provides that if a consumer is in default and has a right to cure the default, the creditor may not bring a collection action unless it gives a Notice of Right to Cure Default. The consumer moved to dismiss the collection actions, alleging that they violated the WCA. The trial court denied the motion to dismiss, concluding that the NBA preempted the WCA's procedural notice requirements for creditors to bring an action to collect on a defaulted credit card account. The trial court then entered judgments in favor of the national bank in its collection actions against the consumer.

The consumer appealed, and the Court of Appeals of Wisconsin reversed the trial court's decision. The appellate court concluded that the WCA's requirement for notice as a condition of debt collection does not significantly interfere with a national bank's powers under the NBA and, therefore, the WCA's procedural notice requirements are not preempted by the NBA. The NBA preempts state laws on "[t]he terms of credit, including the schedule for repayment of principal and interest ... or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan." However, according to the appellate court, "the NBA's savings provision specifically does not preempt state laws [governing] '[r]ights to collect debts.'" The appellate court found that "[t]he WCA's Notice of Right to Cure Default is an application of the State's police powers to protect consumers. It does not affect the credit card lending operations or terms of credit of a national bank. It only comes into play when any creditor (not just a national bank) wants to use the state court system to file an action to collect on a debt defaulted by a Wisconsin consumer. The WCA's notice requirement at most 'incidentally affects a national bank's [f]ederally authorized powers.'" Because the appellate court concluded that the NBA does not preempt the WCA's notice requirements and the facts showed that the national bank at issue did not comply with the requirement to send a Notice of Right to Cure Default before bringing its collection actions against the consumer, the appellate court reversed the judgments in favor of the national bank and remanded with direction for the trial court to dismiss the collection actions, without prejudice.

Amicus Brief(ly): The Wisconsin court probably got this one right, even if national banks may not like the result. State right-to-cure notice requirements come into play in unsecured credit - like the credit card accounts at issue in this case - when the consumer defaults and the holder of the account is ready to take action to enforce the credit agreement. While some state right-to-cure laws only affect secured credit, Wisconsin's statute applies more broadly and requires a notice before acceleration or other action to enforce the account. The Court of Appeals of Wisconsin walked through the preemption analysis carefully and ultimately decided that the cure notice requirement is effectively a state law on the "right to collect debt[s]," which the OCC's regulations say is an area of state law that the NBA does not preempt. The court also found that the state law does not impose a duty on national banks that conflicts with their duties under federal law because it only applies when a creditor (national bank) wants to file an action in state court to collect a debt and that the state law does not interfere with the bank's power and authority under the NBA. These findings are consistent with a Fourth Circuit case interpreting Maryland's repossession regulations that require creditors to send certain notices, where the Fourth Circuit similarly found that the notice requirements were an effort by the state to impose rules affecting the right to collect a debt, an area where the OCC specifically states in its regulations that the NBA does not preempt state law. The good news for the bank is that the reversal of the lower courts' judgments will simply result in dismissal of its complaints without prejudice. All the bank has to do is send a cure notice and, if the consumer does not pay, re-file its complaints.

A California legislator recently introduced Senate Bill 766, the California Combating Auto Retail Scams ("CARS") Act. If you recall, on January 27, the U.S. Court of Appeals for the Fifth Circuit vacated the Federal Trade Commission's CARS Rule, agreeing with the National Automobile Dealers Association and the Texas Automobile Dealers Association that the FTC violated its own regulations by failing to issue an advance notice of proposed rulemaking before promulgating the final rule.

The legislature's summary of the bill states that the bill "would make it a violation of the act for a dealer to make any misrepresentation regarding material information about specified matters relating to the vehicle sale, including the costs or terms of purchasing, financing, or leasing a vehicle, the availability of vehicles at an advertised price, and the remedy available if a dealer fails to sell or lease a vehicle at the offering price. The bill would also make it a violation of the act for a dealer to fail to make certain disclosures clear and conspicuous, including specified information relating to the offering price and any add-on product or services. The bill would make it a violation of the act for a dealer, in connection with the sale or financing of a vehicle, to charge for certain items, including an add-on product or service if the vehicle purchaser or lessee would not benefit from the add-on product or service. The bill would prohibit a dealer from selling or leasing a used vehicle without providing the purchaser or lessee a 10 day right to cancel the purchase or lease.... The bill would require a dealer to create and retain, for a period of 7 years from the date the record is created, all records necessary to demonstrate compliance with the act, including specified records."

Amicus Brief(ly): It's déjà vu all over again! In the wake of the surprising demise of the FTC's CARS Rule as a result of the Fifth Circuit's decision in January, it appears that California legislators are using Rohit Chopra's roadmap for stepping in where the now-quiet federal regulators left off. The California bill is not a one-for-one copy of the FTC's CARS Rule, but California dealers who were ready to comply with the federal rule will not have a lot of ground to make up if the California bill becomes law. The core tenets of the California bill track those of the FTC's CARS Rule - prohibiting misrepresentations in connection with vehicle sales, requiring clear pricing disclosures, and requiring consumer consent for any fees or charges. While there are a few modest differences between the CARS Act and the FTC's CARS Rule, dealers in California should stay focused on this development and make any necessary adjustments to their policies and procedures to ensure that they are ready for compliance with the CARS Act if it becomes law.

Several bills are pending in state legislatures that could dramatically affect sales-based financing transactions in their respective states. Bills pending in Illinois and Maryland would subject such transactions, along with other commercial-purpose financing, to significant regulation. A bill pending in Pennsylvania would be less extensive but would still subject sales-based financing transactions to disclosures, including an APR disclosure. Finally, a bill pending in New York would subject sales-based financing and other types of financing to state usury caps as if the transactions are loans.

Illinois and Maryland: Illinois House Bill 2595, the "Small Business Financing Transparency Act," and Maryland House Bill 693, the "Small Business Truth in Lending Act," would regulate commercial-purpose financing that does not exceed a certain dollar threshold. The bills are largely patterned after existing commercial financing disclosure laws in California and New York. The Illinois bill would require a commercial financing provider to register with the state's Department of Financial and Professional Regulation. The bills define "commercial financing" broadly, including sales-based financing, factoring, and open- and closed-end loans in the definition. However, they have different dollar thresholds; the Illinois bill would exempt any transaction with an amount financed greater than $500,000, while the Maryland bill would exempt only a transaction with an amount financed greater than $2.5 million.

Each bill would require disclosure of an estimated annual percentage rate, along with other information about the proposed transaction, when a provider makes a specific offer of commercial financing. Under each bill, a sales-based financing provider must estimate APR based on the estimated term of repayment and projected sales volume of the financing recipient. These sales projections must be calculated by either the "historical method," using the recipient's past monthly sales volumes, or the "underwriting method" (Illinois) or "opt-in method" (Maryland), using any method that the provider chooses. A provider using the underwriting or opt-in method would be required to report initial, estimated APRs and retrospective, actual APRs to the regulator, who would decide whether the discrepancy between the two was acceptable. The Illinois bill would establish additional reporting requirements for providers of sales-based financing, regardless of the method that a provider uses to project sales volumes.

Penalties for violations of the Illinois law would include civil penalties of up to $10,000 per violation or $50,000 per series of similar violations. Violators could also be liable for restitution or other relief to recipients, and they could have their registrations suspended or revoked. Penalties for violations of the Maryland law would include civil penalties of up to $2,000 per violation or $10,000 per willful violation, with no cap on penalties for similar violations. Restitution would also be available. The Illinois bill would take effect upon its passage, but the registration and disclosure requirements could not take effect before January 1, 2026. The Maryland bill would take effect on October 1, 2025.

Pennsylvania: Pennsylvania House Bill 639, which would amend the Loan Interest and Protection Law, would function somewhat differently from the Illinois and Maryland bills. The Pennsylvania bill would add disclosure requirements for providers of commercial financing to small businesses, including a requirement to disclose a transaction's APR. Instead of using a dollar threshold, the bill would define the term "small business" to mean a business of fewer than 500 employees. The bill would not define the term "commercial financing," making it potentially applicable to any form of commercial financing. It also would not specify a method for estimating APR in sales-based financing transactions or even acknowledge that a disclosed APR at the start of a sales-based financing transaction must be an estimate.

The Pennsylvania bill would use the existing remedies in the LIPL, which include a $10,000 fine per offense, injunctive relief, restitution, and other remedies. The Pennsylvania bill would take effect 60 days after its passage.

New York: New York Senate Bill 1726 would apply the state's existing usury caps to all "financing arrangements." The bill's definition of "financing arrangement" expressly includes sales-based financing agreements. New York's civil usury rate is 16%, except where another law (such as a licensing law) authorizes a greater rate of interest. Any usurious obligation is void. Additionally, a person or entity charging more than 25% is subject to criminal penalties. An obligation of $250,000 or more, other than an obligation secured by one- to two-family residential real property, is exempt from the civil usury cap but not the criminal usury cap. An obligation of $2.5 million or more is exempt from both the civil usury cap and the criminal usury cap. If passed, the bill would take effect immediately.

Amicus Brief(ly): Revenue-based financing is not new, but state regulation of this commercial product is still evolving, as evidenced by these state bills. The states are increasingly hostile to providers' potential return on their advances in amounts that would be usurious if the products were loans. New York was one of the first states to regulate the revenue-based financing product by requiring disclosures, including an estimated APR disclosure. Now, New York is giving up any pretense of allowing the product to exist as anything but a loan subject to its usury laws. The other states are moving a little less aggressively, at least with respect to classifying the product as a "loan," but are requiring providers to give certain estimated cost-related disclosures that experience in New York, California, and other states has told us are difficult to implement. These state law developments make clear that the states continue to have this alternative commercial financing product on their radar for regulation.

---

¹ For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.