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From Banking and Finance Law Daily, December 16, 2013

CFPB, states sue online loan servicer over debt collection practices

By Richard A. Roth, J.D.

The Consumer Financial Protection Bureau has filed suit against CashCall Inc., WS Funding, LLC, Delbert Services Corporation, and their owner J. Paul Reddam, alleging that the companies and individual engaged in debt collection practices that violated the Dodd-Frank Act ban on unfair, deceptive, or abusive acts and practices. According to the CFPB’s complaint, filed in the U.S. District Court for the District of Massachusetts, the defendants violated the laws of as many as eight states while collecting high-cost, high-interest loans that originally were extended by the online lender Western Sky Financial, LLC.

statement by the CFPB noted this was the bureau’s first enforcement action against an online loan servicer.

Collection arrangements. According to the CFPB, CashCall’s subsidiary, WS Funding, LLC, acquired loans that had been made to consumers by Western Sky, and CashCall would service the loans. The loans were for amounts of as much as $10,000 and carried interest rates of up to 343 percent. Often, the borrowers had agreed to allow payments to be withdrawn directly from their bank accounts. Delbert operated as CashCall’s debt collection agency, the bureau says.

As a result of state enforcement actions, Western Sky stopped making loans in September 2013, the bureau says. However, CashCall and Delbert continued to collect the acquired debts in ways that included continuing deductions from consumers’ bank accounts.

CFPB claims. In its complaint, the CFPB alleges that Western Sky’s lending activities violated either usury limits, licensing requirements, or both, that are imposed by laws in Arizona, Arkansas, Colorado, Indiana, Massachusetts, New Hampshire, New York, and North Carolina. Due to the violations of state laws, the consumers had no repayment obligations, which means that CashCall, its affiliates, and their owner were collecting money the consumers did not owe. This, in turn, was an unfair, deceptive, or abusive act or practice that violated federal law, the bureau claims.

According to CFPB Director Richard Cordray, at least 13 states already have filed enforcement actions against CashCall, and additional states were filing suit on the same day as the CFPB. Lenders and servicers could not avoid federal law by moving their activities online, Cordray asserted. “Pretending that a loan is due and must be repaid and taking funds from a consumer’s bank account, even where the loan is void under state law, is unfair, deceptive, and abusive, and it will not be tolerated by federal regulators,” he warned.

In its suit, the bureau is seeking monetary relief for affected consumers, damages, civil penalties, and an injunction against future violations of the federal consumer financial protection laws.

Prior state enforcement actions. Both Western Sky and Reddam’s companies have been subjects of previous state enforcement actions. Western Sky, which is owned by a member of the Cheyenne River Sioux Reservation, ceased making loans when its claims of immunity from state laws based on federal law preemption and sovereign immunity were rejected. State actions were described in previous issues of the Banking and Finance Law Daily (see May 1, 2013June 13, 2013Aug. 12, 2013Aug. 14, 2013; and Aug. 27, 2013).

Companies: CashCall Inc.; Delbert Services Corporation; Western Sky Financial, LLC; WS Funding, LLC

MainStory: TopStory ConsumerCredit CFPB DebtCollection DoddFrankAct EnforcementActions Loans InterestUsury StateBankingLaws UDAAP MassachusettsNews

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