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Dollar Loan Center of South Dakota, LLC v. Afdahl

United States Court of Appeals, Eighth Circuit

August 14, 2019

Dollar Loan Center of South Dakota, LLC, doing business as Dollar Loan Center Plaintiff - Appellee
v.
Bret Afdahl, individually and in his official capacity as director of the South Dakota Division of Banking Defendant-Appellant Dollar Loan Center of South Dakota, LLC, doing business as Dollar Loan Center Plaintiff - Appellant
v.
Bret Afdahl, individually and in his official capacity as director of the South Dakota Division of Banking Defendant-Appellee

          Submitted: June 12, 2019

          Appeals from United States District Court for the District of South Dakota - Pierre

          Before LOKEN, KELLY, and ERICKSON, Circuit Judges.

          Erickson, Circuit Judge.

         Dollar Loan Center ("DLC") and four of its branches were previously licensed as money lenders by the South Dakota Division of Banking ("Division"). On September 13, 2017, Bret Afdahl, Director of the Division, sent DLC a "Cease and Desist and License Revocation Order." This order required DLC to: (1) immediately stop lending money in South Dakota; (2) to notify all consumers who had loans issued after June 21, 2017, that the loans were void and uncollectible; and (3) to surrender all of its money lending licenses and return them to the Division. DLC commenced this action under 42 U.S.C. § 1983 against Afdahl, alleging that license revocation without a pre-deprivation hearing deprived DLC of its procedural due process rights under the Fourteenth Amendment. Afdahl appeals the district court's denial of absolute or qualified immunity and its decision that the quick action exception to a pre-deprivation hearing was not applicable. After careful review of the record, we conclude that Afdahl is entitled to qualified immunity. We reverse with directions to enter judgment in favor of Afdahl on the basis of qualified immunity.

         I. Background

         In South Dakota, the Division of Banking is administered under the direction and supervision of the Department of Labor and Regulation and its Secretary. S.D. Codified Laws § 51A2-2. The Division is vested with the authority to control and supervise banking activities within the state and is to exercise its "quasi-judicial, quasi-legislative, advisory, and other nonadministrative functions independently." Id. Under Chapter 54-4, the Director of the Division is responsible for approving or denying license applications and renewals. S.D. Codified Laws §§ 54-4-41, 54-4-45. If the Director determines that a licensee is engaging in a practice that fails to conform to the law or a commission rule, order, or condition, he may issue a cease and desist order. S.D. Codified Laws § 54-4-48. He is also authorized to "condition, deny, decline to renew, suspend for a period not to exceed 6 months, or revoke a license for 'good cause.'" Under South Dakota's Administrative Procedure and Rules, unless an agency finds that public health, safety, or welfare require emergency action, a license cannot be revoked or suspended unless the agency has given notice and afforded the licensee an opportunity to be heard. S.D. Codified Laws § 1-26-29.

         In July 2010, DLC submitted money lending license applications to the Division for its main place of business in Sioux Falls and a branch location in Rapid City. The applications stated that the businesses would not provide short term consumer loans, payday lending, or title loans as defined under South Dakota Law. A "short term loan" is any loan with a duration of six months or less. S.D. Codified Laws § 54-4-36. Based on the information provided in the applications, the Division approved money lending licenses to DLC. DLC submitted the required annual renewal applications from 2011 to 2016. With the exception of the year 2012, DLC affirmed on its renewal applications that there had not been any substantive changes to the loan products offered since the last application or renewal. In 2012, DLC informed the Division that it was changing from a 52 week to a 65 week amortized loan product.

         In 2017, DCL submitted money lending license applications for branches in Sioux Falls, Aberdeen, and Watertown, South Dakota. These applications also indicated that the businesses would not provide short term consumer loans, payday lending, or title loans.

         Before July 1, 2017, DLC originated and serviced unsecured loans ranging from $100 to $2, 000. The customer was required to make weekly interest payments for 51 weeks (beginning in 2012, a period of 64 weeks) and then on the final week a balloon payment consisting of total principal plus interest. The annual percentage rate ("APR") on these loans varied from 259 percent to 492 percent. The rate varied based on the loan amount and whether the customer had a checking account. In November 2016, DLC was forced to change its loan product after Initiated Measure 21 was approved by the voters and became law. The measure set a maximum finance charge for all money lenders licensed under South Dakota law. Total interest, fees, and charges could not be greater than an APR of 36 percent. S.D. Codified Laws § 54-4-44 prohibited money lenders from evading the rate limitation by imposing other charges or fees.

         The Division understood that DLC would not make additional loans after the measure went into effect. However, in a letter dated July 12, 2017, DLC disputed the Division's understanding and stated it had informed the Division that DLC "planned to maintain its money lending license for each of its locations and that it reserved the right to lend money and service loans consistent with South Dakota law."

         DLC informed the Division that beginning sometime after July 1, 2017, it would begin using a new loan product. Upon reviewing the new product, the Division expressed concern to DLC in a letter dated July 7, 2017, that DLC's new loan product was attempting to use the late fee provision in its new loan contracts as a "device, subterfuge, or pretense to evade" the new law.[1] The Division informed DLC that it would be conducting an examination within the next 30 days. The Division conducted a "targeted" examination on July 13, 2017, and a "full scope" examination on August 17-18, 2017.

         The Division's investigation revealed that DLC's new loan product involved unsecured loans ranging from $250 to $1, 000 with a seven day term, which under South Dakota law was a short term loan. The stated APR on the new loan product was between 35.87 percent and 35.98 percent and weekly late fees varied from $25 to $70 per week. The main difference between the new loan product and the previous loan product was the amount due the first week. On the new loan, the first payment included principal plus the interest. If the customer did not make the payment, a $70 late fee was imposed every seven days until the loan, all accrued interest, and late fees were paid in full. This new loan product with a substantially higher payment due the first week caused the loan portfolio's delinquency rate to exceed 50 percent. After late fees are included in the APR as finance charges, the Division determined that the APR ranged from 300.86 percent to 487.64 percent.

         The Division also discovered that between July 1, 2017, and August 17, 2017, late fees accounted for 90.22 percent of DLC's total income. The Division concluded that DLC's new loan product was a short term consumer loan; that the late fees charged are anticipated fees that must be included in the finance charge calculation; and that the product violated the maximum APR allowed to be charged under South Dakota law. In light of these findings, Director Afdahl issued on September 13, 2017, a cease and desist order and a license revocation order. He revoked DLC's money lending licenses and also ordered DLC to stop engaging in the business of lending money in South ...


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