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Consumer Credit Regulation: 7.8.5.3 Other Claims Based on Unlicensed Lending

Even if the usury statutes do not provide a remedy and the common law rule that a contract made in violation of a regulatory statute cannot be invoked, operating without a required license is a UDAP violation in many states.912 In the alternative, a court may be willing to require an unlicensed entity to refund any money a consumer has already paid, on an unjust enrichment theory.913 Depending on the language of the act, aiding and abetting lenders to create a scheme whereby lenders could operat

Consumer Credit Regulation: 7.8.6.1 Remedies Under the National Bank Act and DIDA

The National Bank Act establishes the remedy for a usurious loan issued by a national bank: the lender forfeits the entire contract interest, and the borrower may recover a penalty of twice the interest paid.921 The action must be commenced within two years of the occurrence of the usurious transaction.922 Federal remedies are the same for federal savings associations.923

Consumer Credit Regulation: 7.8.6.2.1 Overview of RICO

The Racketeer Influenced and Corrupt Organizations Act (RICO)928 provides powerful civil remedies,929 including treble damages, injunctive relief,930 and attorney fees, to victims of a broadly defined range of “racketeering activity” and to those who have been subjected to the collection of an “unlawful debt.” “Unlawful debt” includes any usurious debt bearing interest of at least twice the “enforceable rate.”9

Consumer Credit Regulation: 7.8.6.2.3 Alleging a RICO claim based on the collection of an unlawful debt

An unlawful debt is either an illegal gambling debt953 or a debt incurred through the “business of lending money or a thing of value” at a usurious rate, provided that any part of the principal or interest is unenforceable under state or federal usury law and the rate charged is at least twice the enforceable rate.954 The plaintiff must be able to point to a federal or state usury statute that sets the rate that the transaction exceeded.955

Consumer Credit Regulation: 7.8.6.2.5 RICO and creditor overcharges

A number of RICO cases involving allegedly fraudulent creditor overcharges have been litigated.989 For example, the Supreme Court allowed a RICO claim to proceed against a bank that, after contracting to lend to a business at the “prime rate” that it charged its most creditworthy customers, in fact lent at a higher rate.990 The mailing of interest statements assessing excessive interest constitutes mail fraud and provides the underlying “predicate offense” to support such a RICO action.

Consumer Credit Regulation: 7.8.7 Class Actions

Usury cases are well-suited to class action treatment.1015 Lenders who overcharge typically do so systematically, so there are common issues of law or fact.1016 Often each borrower is entitled to a relatively small recovery, such as double the amount of the overcharge. A primary purpose of class actions is to provide a way to recover damage awards that are too small to make individual suits economically feasible.1017

Consumer Credit Regulation: 7.8.7a Who Is Liable for Usury Violations?

Many state lending laws provide remedies for, among other things, “receiving” usurious interest.1025 Liability under such a law can extend beyond the lender that contracted with the borrower, if the usurious charges were funneled to another person or company.1026 It may also be possible to hold an individual liable by piercing the corporate veil.1027

Consumer Credit Regulation: 7.9.1.1 Introduction

Sometimes a consumer prefers to litigate a claim in federal court. Even if the consumer files in state court, the creditor may have the right to remove the case to federal court. This subsection provides a brief outline of issues regarding federal jurisdiction in consumer credit cases, including unique issues that apply to usury claims and claims against federally chartered banks.

Consumer Credit Regulation: 7.9.1.3.1 Nature of complete preemption

The doctrine of complete preemption is a rare, but important, exception to the rule that a case raising only state law claims cannot be removed to federal court simply because federal law might preempt those claims. When a federal statute completely preempts a state law cause of action, then a claim that comes within the scope of the federal statute, even if pleaded solely in terms of state law, is in reality a federal claim and is removable.1043

Consumer Credit Regulation: 7.9.1.3.2 Complete preemption under the National Bank Act

In Beneficial Bank v. Anderson, the Supreme Court identified one portion of the National Bank Act as completely preempting state law: usury claims that are raised against national banks.1050 The Court held that sections 85 and 86 of the National Bank Act provide the exclusive cause of action for these claims. Thus, any case raising a state law usury claim against a national bank is removable to federal court.

Consumer Credit Regulation: 7.9.1.3.3 Assignees, non-banks, and state-chartered banks

In a pre-Beneficial Bank case, the Eighth Circuit held that once an open-end credit account is assigned to a national bank, any claim about the illegality of the interest rate is a usury claim against the bank and thus is completely preempted.1062 On the other hand, the National Bank Act does not completely preempt usury claims against a non-bank purchaser of loans, even loans originated by national banks.1063

Consumer Credit Regulation: 7.9.1.4 Diversity Jurisdiction

For diversity jurisdiction, the action must be between citizens of different states and the amount in controversy must exceed $75,000.1077 The Supreme Court has held that a bank is located, for diversity jurisdiction purposes, in the state where its main office is located, as set forth in its articles of incorporation.1078 This definition permits national banks to sue under the diversity provision or to remove state court actions in every other state.

Consumer Credit Regulation: 7.9.1.5 Jurisdiction under the Class Action Fairness Act

The Class Action Fairness Act relaxes the requirements for diversity jurisdiction over class actions.1080 It allows a class action to be filed in or removed to federal court in certain circumstances, even if the parties do not meet the usual standards for diversity of citizenship. The total amount sought by the class must exceed $5 million. The Class Action Fairness Act is discussed in detail in another treatise in this series.1081

Consumer Credit Regulation: 7.9.2.1 Overview

Whether courts can exercise personal jurisdiction over a lender that is located in another state is a significant question, given high-cost lenders’ attempts to operate from states with lax regulation while making loans in more protective states. The question involves both state law and constitutional issues.

Consumer Credit Regulation: 7.9.2.3 Personal Jurisdiction over Securitization Trusts

Whether courts can exercise personal jurisdiction over a securitization trust that is located in another state is a significant question as more and more obligations are securitized. Courts are likely to find specific jurisdiction if the debtor’s claim relates to a security interest held by the trust in real or personal property that is located in the debtor’s home state.1114 This conclusion is supported by a United States Supreme Court decision, Shaffer v. Heitner: