All Banking Law, All in One Place. Bloomberg Law: Banking is the comprehensive research solution that powers your practice with access to integrated banking-related legal news, analysis,...
By Chris Bruce
Sept. 2 — A recent ruling by a federal judge in California adds heft to the Consumer Financial Protection Bureau’s enforcement efforts but raises new questions about marketplace lending, lawyers said ( Cons. Fin. Protection Bureau v. CashCall, C.D. Cal., No. 15-cv-07522, 8/31/16 ).
In an Aug. 31 decision, Judge John F. Walter of the U.S. District Court for the Central District of California said Orange, Calif.-based CashCall Inc. and others engaged in deceptive practices by servicing and seeking full payment on loans rendered uncollectible or partially void by state usury and licensing laws.
He also said CashCall was the “true lender” on loans issued and sold to CashCall by Western Sky Financial, a South Dakota limited liability company licensed to do business by the Cheyenne River Sioux Tribe (CRST) in South Dakota.
The loan agreements identified Western Sky as the lender, and said the loans were made under CRST tribal law. But Walter agreed with the CFPB that the choice of law provision should be ignored, saying the law of the borrowers' home states governed — laws that at least partially voided those laws or barred collection on them.
According to Walter, “true lender” status depends on the substance of a transaction, not its form. Among other points, he said, CashCall put its own money at risk; funded a reserve account that Western Sky used to make loans; bore the risk of default; and “purchased each and every loan before any payments on the loan had been made.”
Based on the totality of the circumstances, Walter said, CashCall was the real lender, not Western Sky. “Accordingly, the Court concludes that the entire monetary burden and risk of the loan program was placed on CashCall, such that CashCall, and not Western Sky, had the predominant economic interest in the loans and was the ‘true lender' and real party in interest,” Walter said.
In a Sept. 1 memo on the ruling, Mayer Brown partners Steven Kaplan and Ori Lev said the ruling helps vindicate the CFPB’s position that collecting on loans that are partially void or uncollectible under state law is a violation of federal law.
The decision also has implications for marketplace lenders. Using the “totality of the circumstances” test to determine which transaction party has the “predominant economic interest” in a transaction might also affect marketplace lenders that rely on loans made and funded by bank partners, they said.
“Given the fact-intensive nature of this approach, the details of marketplace lending and other bank partner programs may lead to different conclusions even in those jurisdictions where courts adopt the ‘totality of the circumstances' approach,” they said.
If CashCall appeals the ruling, they added, the U.S. Court of Appeals for the Ninth Circuit “will have an opportunity to address this important but unsettled issue.”
CashCall did not immediately respond to a Sept. 2 request for comment on the ruling. A CFPB spokesman Sept. 2 declined to comment.
To contact the reporter on this story: Chris Bruce in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Seth Stern at email@example.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)