In what appears to be the first lawsuit by a state attorney general of its kind, the Illinois AG recently filed a state court lawsuit against a small loan lender alleging violations of the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices in addition to violations of state law. Section 1042 of Dodd-Frank (12 U.S.C. 5552) authorizes state AGs to bring civil actions in the name of the state against state-licensed entities to enforce provisions of Dodd-Frank.
According to the complaint, the lender (which was licensed under Illinois law) offered lines of credit on which it charged a stated annual interest rate ranging from 18% to 24%. It alleges that to evade the state law 36% annual interest rate cap, the lender charged borrowers a mandatory “account protection fee” ranging from $10-$15 for every $50 of the borrower’s outstanding balance which was payable every two weeks in addition to accrued daily interest. The complaint charges that the fee was “nothing more than undisclosed interest,” resulting in an actual interest rate between 350% and 500%. It also alleges that the lender instructed borrowers to make a monthly minimum payment, but did not apply any of the minimum payment toward principal. In addition to alleging that the lender misrepresented the true cost of its loans, the complaint alleges that the lender’s loan product was “structurally unfair” because the account protection fee resulted in “an endless cycle of debt.”
The Illinois AG’s reliance on Dodd-Frank appears to be an attempt to use Dodd-Frank’s prohibition of abusive acts or practices as an alternate way of challenging the account protection fee should it be found not to violate Illinois law. This lawsuit and other state AG lawsuits relying on Dodd-Frank open the door for state court judges, rather than the CFPB, to determine what is an “abusive” act or practice. The Illinois AG’s lawsuit also opens the door to the possibility that her theory of liability could be used to attack other loan products such as payday loans that are claimed by the CFPB, state AGs and consumer advocates to create a cycle of debt for consumers.