On Wednesday of this week, a federal district court in California handed the Consumer Financial Protection Bureau a victory in its lawsuit against consumer lender CashCall. The court's ruling grants the CFPB partial summary judgment on its claim that CashCall committed deceptive acts in violation of the Consumer Financial Protection Act by collecting illegal interest charges from its customers. The court's decision rejects CashCall's "tribal model" of lending, in which it sought to evade the application of state usury laws by using a company based on the Cheyenne River Sioux Reservation to originate its loans and claiming that tribal law, not state law, governed the loans.
In its ruling, the district court held that although the loans were purportedly made by the tribal company (Western Sky) and then sold to CashCall, the true lender was CashCall, because under the arrangement between the companies, it was CashCall's money that was at risk. Thus, the court held, there was no basis for applying tribal law to the loans because the loan transactions bore no substantial relationship to the tribe. State usury laws therefore applied. Under those laws, the loans' interest rates, with APRs well into the triple digits, were illegal. And, the court ruled, telling consumers they were obligated to pay illegal interest is a deceptive act under federal law. The court also held CashCall's founder personally liable for the violations.
The CashCall/Western Sky shenanigans have produced a mountain of litigation, including state enforcement actions and a number of decisions addressing the purported requirement in loan agreements that borrowers have to make any claims through tribal arbitration processes (which don't even exist). The CFPB's victory may be a step toward finally resolving the issues raised by CashCall's actions. However, CashCall has litigated the case vigorously and may well appeal once there is a final judgment in the case. Yet to be determined by the trial court are remedies for the violations.