Recently, the U.S. District Court in Los Angeles ruled in favor of the Consumer Financial Protection Bureau (“CFPB”) against online consumer lender, CashCall, Inc. (“CashCall”), in finding that CashCall was the “true lender” on thousands of consumer loans originated by Western Sky Financial (“Western Sky”), and thus rendering the loans void and uncollectable.
Like many online lenders, CashCall’s consumer loan business included partnering with a bank or other third party entity in order to do business across the country and avoid state usury limits. In this instance, CashCall partnered with lender Western Sky, which was associated with the Cheyenne River Sioux Tribe in South Dakota, and not subject to any state usury laws. Attempting to take advantage of Western Sky’s preemption, CashCall entered into certain purchase and service agreements with Western Sky, whereby CashCall agreed to purchase all of Western Sky’s loans after a three-day retention period. Borrowers applied for the loans via telephone or Western Sky’s website. Western Sky issued the loans and performed certain origination functions; however, borrowers did not make a single payment to Western Sky prior to the loan being sold. CashCall paid Western Sky a premium for each loan above the amount actually financed, purchased every single Western Sky loan, and further agreed to cover indemnity and other costs. All economic risks and benefits of the transaction passed to CashCall upon loan assignment.
CFPB argued that the loans, which carried annual interest rates as high as 80% to borrowers in various states, should have been subject to state licensing and usury laws despite Western Sky’s tribal preemption and the choice of law provisions in the loan agreements. Based on the totality of circumstances, the federal court held that CashCall, not Western Sky, was the “true lender” because CashCall had the “predominant economic interest.” The key factor in its decision was that CashCall, not Western Sky, had placed its money at risk. Further, the court concluded CashCall (and affiliate Delbert Services Corporation) had engaged in deceptive practices in violation of the Consumer Financial Protection Act (the “CFPA”) by servicing and collecting on the void and unenforceable loans. Founder and CEO of CashCall (and sole owner), John Paul Reddam, was also found personally liable under the CFPA because Reddam participated in or had the authority to control the deceptive acts of which he had knowledge.
TAKEAWAY: Lenders relying on banks or third parties to originate their loans should take note in structuring their loan origination models to ensure they don’t bear the entire risk of the transaction, in light of the CFPB’s “true lender” approach.
See full decision here: Consumer Financial Protection Bureau v. CashCall, Inc. et al.