Ruling Boosts CFPB, Raises Marketplace Lending Questions

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

To contact the editor responsible for this story: Seth Stern at

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