Appeals Court May Tackle `True Lender’ Debate Affecting Fintechs, Online Lenders

By Chris Bruce

A federal appeals court may offer guidance on “true lender” analysis and how it affects bank partnerships with marketplace lenders and fintech companies ( Cons. Fin. Protection Bureau v. CashCall Inc. , 9th Cir., 17-cv-80006, petition for interlocutory appeal 1/13/17 ).

At issue is a petition by CashCall Inc., an online lender based in Orange, Calif., that’s now before the U.S. Court of Appeals for the Ninth Circuit. CashCall wants the Ninth Circuit to hear a mid-case appeal from an August ruling in a deceptive practices case that said it was the “true lender” in an arrangement with Western Sky Financial, a self-described tribal loan company.

The Ninth Circuit hasn’t yet acted on the petition, but it’s being closely watched because the lower court’s “true lender” analysis might disrupt an array of other partnerships with banks, depending on how they’re structured.

“The Ninth Circuit decision in CashCall could have serious implications not only for payday lenders but also Silicon Valley fintech companies,” said Christopher L. Peterson, formerly a senior CFPB official and now a professor at the University of Utah’s S.J. Quinney College of Law in Salt Lake City.

Appellate Action Uncertain

CashCall asked the Ninth Circuit to review specific questions in connection with the ruling by the U.S. District Court for the Central District of California, which arose in the context of Indian tribal law. CashCall partnered with Western Sky Financial, which was licensed to do business by the Cheyenne River Sioux Tribe in South Dakota before it went out of business in 2013.

The lower court looked past the lending arrangement’s nominal structure and identified CashCall — rather than Western Sky — as the real lender. Although Western Sky made the loans, CashCall “had the predominant economic interest in the loans and was the `true lender’ and real party in interest,” the lower court said.

The ruling came in an enforcement lawsuit brought by the Consumer Financial Protection Bureau. For CashCall, the lower court’s holding, if it stands, leaves it exposed to the CFPB’s demands for CashCall to give up all principal and interest it collected in its dealings with Western Sky, though the total amount isn’t clear. The CFPB also seeks fines against CashCall.

In general, “true lender” analysis scrutinizes relationships between banks and nonbanks to discern which party actually makes the loan to a consumer. Other disputes, including those over which laws to apply to bank partnerships, sometimes are described informally as “true lender” cases even if the lender’s real role isn’t an issue.

Demanding Tests

The CashCall case in the lower court, though ongoing, has been stayed to allow CashCall’s request for an interlocutory appeal. The appeals court could say no and allow the lower court proceeding to continue. This kind of immediate discretionary appeal sought by CashCall faces demanding tests.

In January, the CFPB urged the Ninth Circuit to deny CashCall’s petition. The CFPB said the case isn’t ready from a procedural standpoint, adding that the district court’s true lender analysis already squares with Ninth Circuit precedent and its scrutiny of economic substance in other cases.

Even if the court grants the petition, it could still ignore the true lender issue and instead address other questions posed by Cashcall. Among others, the company also has asked the Ninth Circuit to review the constitutionality of the CFPB’s structure— a question at the forefront of other cases, including an appeal before the full D.C. Circuit in a case involving PHH Corporation of Mount Laurel, N.J.

Post-Madden Guidance?

The viability of some bank partnership arrangements has been a significant theme since at least May 2015, when the Second Circuit decided Madden v. Midland Funding. In that case, the Second Circuit said Midland Funding, a unit of San Diego-based Encore Capital Group, couldn’t use its relationship with a national bank to preempt New York usury limits on loans it acquired and pursued in collection.

The ruling, which has direct application only in the Second Circuit, wasn’t a real “true lender” dispute because the lender’s identity wasn’t at issue. Nevertheless, as in CashCall, it raised a series of questions about the ability of nonbank lenders to use partnerships with banks to sidestep state restrictions.

Although the CashCall and Madden cases present different issues, those and other decisions mean that online lenders will have to be more vigilant about usury questions, according to Anthony R.G. Nolan, a partner in the New York offices of K&L Gates.

“The theme they are all getting at is that you can’t take it for granted that a court will enforce a consumer contract in accordance with the law as written,” Nolan told Bloomberg BNA. “That’s going to have a big impact on the online lending business.”

A grant on the true lender question also would give the Ninth Circuit the chance to resolve tension between CashCall and Beechum v. Navient Solutions Inc., a ruling by a different judge in the Central District of California. In that case, which was decided less than a month after CashCall, the court took a different approach, declining to characterize the Student Loan Marketing Association as the “true lender” in connection with California usury laws.

“It would be quite useful to the marketplace lending community to have the Ninth Circuit reconcile the differing positions taken by the California Central District Court with respect to the `true lender’ issue in the CashCall and Navient Solutions cases,” said Henry G. Morriello, a partner in the New York offices of Arnold & Porter Kaye Scholer.

Partnerships Can Work

Also up for debate is the real impact of CashCall. In its August ruling, the lower court said the core question was which company — CashCall or Western Sky — placed its own money at risk. The court said CashCall bore the monetary burden, using a reserve account to fund the loans made by Western Sky and by purchasing all of those loans and keeping all the default risk and regulatory hazard.

Mike Whalen, a partner in Goodwin Procter’s technology group and co-leader of the firm’s fintech practice, said the CashCall case, and its test for predominant economic interest, has its benefits. He said it’s helpful because banks and their fintech partners can meet the test if banks fund loans with their own money and put that money at risk, while also realizing reasonable economic benefit from the loans they make and retaining appropriate loan-level risk.

“I actually think this case can be helpful because it provides a little bit of a roadmap,” Whalen told Bloomberg BNA. “The predominant economic interest test is a higher-bar test for bank partnerships, but one that bank partnerships can satisfy.”

Tribal Lenders

The true lender debate is of particular interest to Native American-owned financial services providers. The Native American Financial Services Association (NAFSA), which represents their interests, says companies like Western Sky, though sometimes described as “tribal lenders” or marketing themselves with that label, aren’t really economic arms of tribal governments.

“NAFSA member tribal lending enterprises are structured in a way in which the lending enterprise that originated the loan is also the entity that services the loan, which means they do not encounter true lender concerns,” NAFSA Executive Director Gary Davis said in an email to Bloomberg BNA.

Ongoing questions about bank partnerships may also be answered outside the courts. A memo released early this year by the House Financial Services Committee said an expected legislative package could include a “ Madden v. Midland fix” based on language from a bill introduced in the last Congress by Rep. Patrick McHenry (R-N.C.).

To contact the reporter on this story: Chris Bruce in Washington at

To contact the editor responsible for this story: Michael Ferullo at

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