The CFPB announced that it has entered a settlement with Mark Corbett to resolve the Bureau’s allegations that Mr. Corbett violated the Consumer Financial Protection Act in connection with his brokering of contracts providing for the assignment of veterans’ pension payments to investors in exchange for lump sum amounts.  In its press release announcing the settlement, the Bureau stated that its investigation “is being conducted in partnership with the Office of Arkansas Attorney General Leslie Rutledge and the South Carolina Department of Consumer Affairs.”

The findings and conclusions set forth in the consent order state that the following conduct by Mr. Corbett constituted unfair and deceptive acts or practices in violation of the CFPA:

• Misrepresenting that the transactions were valid and enforceable when they were in fact void because federal law prohibits agreements under which another person assigns the right to receive a veteran’s pension payments and failing to disclose to consumers that the transactions were illegal because of such federal law prohibition
• Misrepresenting to consumers that the transactions were sales “and not high-interest credit offers”
• Misrepresenting to consumers the date by which they would receive funds from investors
• Failing to inform consumers of the interest rates charged on the transactions

The consent order permanently bans Mr. Corbett from brokering, offering, or arranging agreements between veterans and third parties under which the veteran purports to sell a future right to an income stream from the veteran’s pension or assisting others in engaging in such conduct.  Due to his inability to pay, the consent order imposes a civil money penalty of $1.

The CFPB does not articulate the basis for its legal conclusion that the transactions were loans rather than sales and does not identify the states whose laws were purportedly violated.  Perhaps its conclusion rests on the premise that the veterans had an absolute obligation to repay the lump sum amounts, a feature that state law might use to define a loan.  In this regard, we note that the Bureau alleged that the veterans, in exchange for lump sum amounts paid by the investors, “are thereafter obligated to repay a much larger amount by assigning to investors all or part of their monthly pensions or disability payments” and that the veterans “were required to purchase life insurance policies so that, should a veteran die and the income stream stop, the outstanding amount on the contract would still be paid.”

Alternatively, the CFPB might have based its conclusion on the alleged invalidity of the assignments.  This was the principal (if not only) argument for why an assignment of settlement benefits should be recharacterized as a loan that the New York AG and the Bureau successfully asserted in a lawsuit filed against RD Legal Funding under former Director Cordray’s leadership and now on appeal to the Second Circuit.  While the district court’s ruling that the CFPB’s structure is unconstitutional has garnered the most attention, the underlying allegation in the lawsuit, and the principal issue addressed in the district court’s opinion, was a claim that RD Legal’s litigation settlement advance product is a disguised usurious loan that is deceptively marketed and abusive.  In particular, the complaint alleged that the transactions were falsely marketed as assignments rather than loans, violated New York usury laws, and could not be assignments because the underlying settlements and/or applicable law expressly prohibited assignment of claimant recoveries.

For some reason, the CFPB and NY AG did not argue in RD Legal Funding, and the court did not determine, that the transactions were loans because payment of settlement benefits to RD Legal was assured.  Rather, the decision was based on the district court’s conclusion that the benefit assignments were void and as a result, the transactions were necessarily disguised loans.  As we observed, the basis for the conclusion that an invalid assignment of assets is necessarily a loan is untethered to the New York definition of usurious loans.

Under former Director Cordray’s leadership, the CFPB also took action against structured settlement and pension advance companies.  The first CFPB enforcement action under former Acting Director Mulvaney’s leadership was also filed against a pension advance company and alleged that the company made predatory loans to consumers that were falsely marketed as asset purchases.  The new consent order indicates that finance companies whose products are structured as purchases rather than loans remain a CFPB focus.  It is a reminder of the need for all players in this space, including litigation funding companies and merchant cash advance providers, to revisit true sale compliance, both in the language of their agreements and in the company’s actual practices.  (While the CFPB’s jurisdiction over small business finance is limited, this is not true of other enforcement authorities, such as state AGs.)