In Kaur v. World Bus. Lenders, LLC, Judge Willian Young of the United States District Court for the District of Massachusetts has partially denied a motion brought by World Business Lenders, LLC and Axos Bank to dismiss claims that the defendant lenders violated the Massachusetts usury statute and the Massachusetts Consumer Protection Act, General Law Chapter 93A.
Usury laws limit the interest rate that lenders can charge on a line of credit or a loan. The Massachusetts law against usury, Massachusetts General Law Ch. 271, §49(d), creates an annual interest rate cap of 20 percent. However, the Massachusetts usury statute allows lending institutions to avoid the 20% state usury cap if they register the loan with the State Attorney General’s Office within two years of making it. Further, the National Bank Act exempts nationally chartered banks from such state usury caps. Moreover, there is a controversial practice of non-bank lenders marketing, funding, and collecting on a loan that a nationally charted bank has formally underwritten and originated on paper before assigning the loan to the non-bank lender. This essentially allows the non-bank lender to borrow a nationally charted bank’s federal preemption. Proponents of these so-called “rent-a-bank” operations argue that such high-interest loans provide a legitimate service by granting credit to under-served, high-risk borrowers. Opponents argue that these loans trap borrowers in a cycle of debt where they either default or pay far more in interest than the original principal. This is one of the issues discussed in Kaur v. World Bus. Lenders, LLC.
In March 2018, borrowers Ramanjeet Kaur and Kulwinder Singh Uppal took out a $175,000 loan for their small business from World Business and Axos’s predecessor with annual percentage rate interest in excess of 92 percent. The borrowers, a married couple, used their home as collateral for the loan. Less than seven months later, World Business began foreclosure proceedings against the borrowers’ home after their loan fell into arrears. The borrowers filed suit alleging World Business had violated the state’s usury law, because it identified the Axos, as opposed to World Business, as the lender when it registered with loan with the Attorney General pursuant to Gen. Law Ch. 271 §49(a). They also alleged that World Bank had engaged in two forms of unfair and deceptive business practices in violation of Gen. Law Chapter 93A: (1) issuing a loan that was doomed to fail and (2) deceptively identifying World Business as the loan “servicer” in the loan documents when it was actually the “true lender.” The lenders move to dismiss the borrowers’ claims.
The Court found that the borrowers’ claims that the loan violated state usury laws could not survive and must be dismissed, because World Business had registered the loan with the Massachusetts Attorney General’s Office within two years of making the loan, as required by section 49(d) of Gen. Law Ch. 271, which did not require the registration to identify the actual lender (and required only information concerning the borrower and the loan itself).
However, the Court found that the borrowers had alleged sufficient facts to proceed with their claims that the defendant lenders were in violation of Chapter 93A. In Massachusetts, the Supreme Judicial Court has held that a “high cost home mortgage loan” violates Chapter 93A if the lender should have recognized the borrower was unlikely to be able to repay the loan. Although the loan in this case was not a home mortgage loan, Judge Young concluded that the law from home mortgage cases “serves as a ‘recognized or established common law or statutory concept of unfairness’ relevant to this case.” Citing the fact that the borrowers’ loan was roughly the same amount that they had paid for their house (which was the collateral for the loan), the loan application was missing important information about the business itself that could have been used to evaluate the likelihood that the loan could be repaid, and World Business marketed its loans to applicants with low credit scores who could not otherwise obtain a loan as factors potentially relevant to whether the issuance of the loan was an unfair and deceptive practice, the Court denied so much of the defendants’ motion as sought dismissal of the claims that the defendants had violated General Law Ch. 93A.
The legal issues surrounding these lending practices are very much unsettled areas of law within Massachusetts, and it is highly likely these issues will arise again.