Earlier this week, the U.S. Court of Appeals for the Ninth Circuit gave the CFPB a major victory in its long-running fight against a payday lender that had sought to evade state usury limits and licensing laws by originating its loans through an entity owned by a member of a Native American tribe using agreements that it claimed were subject only to tribal law. The decision in CFPB v. CashCall rejected separation-of-powers challenges to the agency’s enforcement action, and took a pro-consumer view of the Consumer Financial Protection Act’s prohibition of deceptive acts or practices and the CFPB’s ability to secure penalties and restitution for violations of the Act. The unanimous decision (from a panel featuring two Trump appointees, one of who wrote the opinion) is likely to significantly bolster the CFPB’s enforcement efforts, both generally and as applied to similar lending operations.
CashCall used an entity called Western Sky Financial, which was formed by a tribal member and operated on tribal land but was not owned or operated by the tribe itself, to originate loans through phone and internet transactions with borrowers in states where the terms of the loans were illegal. CashCall supplied the funds for the loans, purchased them shortly after they were made, and serviced them. As the Ninth Circuit put it, “Western Sky’s involvement in the transactions was economically nonexistent and had no purpose other than to create the appearance that the transactions had a relationship with the Tribe.” The loan documents claimed that tribal law was applicable to the transactions and that they were not subject to the laws of any state or the federal government.
The CFPB brought an enforcement action alleging that CashCall and the individual who was its sole owner had engaged in a deceptive practice by collecting payments on loans that were unenforceable under state law, using the pretense that they were valid under tribal law. A federal district court in California ruled in favor of the CFPB’s claim that the transactions were unlawful, but limited the penalties it awarded on the ground that CashCall and its owner had not acted recklessly. The court also denied restitution because, in its view, the agency had not shown that consumers had been denied the “benefit” of their usurious bargains with CashCall.
Both sides appealed, and the resolution of the case was delayed pending the Supreme Court’s decision in Seila Law on the constitutionality of the CFPB’s structure, as well as subsequent litigation over the effect of Seila Law’s holding on enforcement actions initiated while the CFPB’s director enjoyed the tenure protection held unconstitutional in Seila Law.
In its opinion this week, the Ninth Circuit held that the Supreme Court’s decision last year in Collins v. Yellen had laid to rest any argument that the validity of the agency’s enforcement action was affected by the unconstitutional tenure provision. The decision aligns with the Fifth Circuit’s recent en banc decision in CFPB v. All American Check Cashing Company in holding Collins dispositive on the CFPB’s authority to maintain enforcement actions brought before the decision in Seila Law. The Ninth Circuit declined to entertain a different separation-of-powers challenge to the enforcement action, based on the theory that the CFPB’s funding is unconstitutional, because the defendant had waived it.
On the merits, the court held that the CashCall’s loan transactions were indeed subject to state law, not tribal law, because the tribe had no substantial relationship to the transactions, and the parties could not agree to exempt the transactions from governing state laws that prohibited them by asserting a nonexistent relationship to the tribe. The court further held that CashCall’s deceptive claim that transactions clearly unlawful under state law were valid under inapplicable tribal law violated the Consumer Financial Protection Act. CashCall’s argument that deception concerning state-law matters was outside the scope of the Act, the court held, was contrary to the clear terms of the Act.
The court set aside the district court’s judgment only insofar as it had limited the CFPB’s recovery for the violations. The court held that the CFPB could collect enhanced penalties against CashCall, and that liability could be imposed on its individual owner, because they had acted recklessly by continuing to collect on the loans after the risk that their conduct was unlawful was so obvious that they must have been aware of it.
Finally, the court rejected the district court’s reasons for denying the CFPB’s request for restitution. The court held that restitution for amounts paid pursuant to unenforceable loan transactions was appropriate regardless of the claim that consumers had received the “benefit” of their bargain (i.e., a loan at a usurious rate of interest).