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From Banking and Finance Law Daily, September 6, 2016

Consumer lender can’t hide behind tribal lending model, court says

By Richard A. Roth, J.D.

The Consumer Financial Protection Bureau has convinced a federal district court judge that high-interest consumer loans ostensibly made by a Cheyenne River Sioux Tribe-licensed lender actually were made by a California-based company. Since California-based CashCall, Inc., was the true lender, the credit agreements were governed by the laws of the borrowers’ home states, which prohibited the high-interest loans, the judge said. As a result, the credit agreements and the servicing and collection efforts by CashCall’s corporate affiliates all violated the Dodd-Frank Act ban on unfair, deceptive, or abusive acts or practices (CFPB v. CashCall, Inc., Aug. 31, 2016, Walter, J.).

According to the judge, CashCall and Western Sky Financial got together after pressure by the Federal Deposit Insurance Corporation caused two state banks to end their "rent-a-bank" agreements with CashCall. CashCall understood that its loans, which carried interest at annual percentage rates that exceeded 100 percent, would not be permitted by the usury laws of a number of states and thus needed a way to avoid those laws. When it could no longer rely on federal banking law to preempt the application of state usury laws to its loans, it turned to Western Sky, which was licensed by the Cheyenne River Sioux Tribe (CRST) and located on the CRST reservation. The "Indian Commerce clause" of the U.S. Constitution would provide the needed shield, CashCall believed.

Relationship described. The CFPB’s theory depended on the judge accepting that CashCall, not Western Sky, was the true lender. That required a focus on the details of the two companies’ business relationship.

According to the judge, CashCall created a subsidiary—WS Funding—to buy all of the loans that Western Sky originated. CashCall maintained a reserve account into which it deposited funds that Western Sky used to fund the loans it made. CashCall bought all of the loans before borrowers made any loan payments.

CashCall covered most of Western Sky’s operating costs, and it also agreed to indemnify Western Sky against "any and all civil, criminal, or administrative claims or actions . . ."

Consumers applied for credit using Western Sky’s website or toll-free telephone number. Initially, all telephone calls were handled by CashCall employees, but later employees of Western Sky dealt with most applications and CashCall employees only helped with any overflow. CashCall also hosted the servers on which online applications could be made.

After buying the loans, CashCall handled all of the servicing duties. If a loan went into default, it was transferred to another CashCall affiliate—Delbert Services Corporation—for collection.

Who’s the true lender? Given the nature of the companies’ lending and collection arrangement, CashCall was the true lender, the judge decided. The principal factor was that CashCall, not Western Sky, had the predominant economic interest. CashCall was the company that put its money at risk when a loan was made.

CashCall funded the loans and it bought all of the loans from Western Sky at a 5.145-percent premium, the judge pointed out. CashCall also guaranteed Western Sky a minimum payment of $100,000 each month, with an additional $10,000 administrative fee. CashCall funded and bought every loan that Western Sky made, assumed all of the risks and benefits as soon as a loan was bought, and accepted all of the default, legal, and regulatory risk.

State usury laws. Since CashCall, not Western Sky, was the true lender, the loan agreement choice-of-law provision would not be enforced, the judge then said. The loan documents said they were to be governed by the Indian Commerce clause and CRST laws. However, the CRST had no substantial relationship to either the parties or the transactions, and there was no other reasonable basis to rely on CRST law.

The 16 states in which the various borrowers lived had a materially greater interest in the borrowers and the transactions than did the CRST, the judge added. Relying on CRST law also would be contrary to the states’ fundamental public policy.

As a result, the laws of the borrowers’ home states would govern the transactions, the judge decided.

UDAAP violations. According to the judge, CashCall did not seriously dispute that the loans were void and uncollectible under the state usury laws. Given that the loans were uncollectible, collection efforts by CashCall and Delbert Services were deceptive because they created the false, contrary impression. CashCall, Delbert Services, and WS Funding "completely and utterly fail to explain" how their conduct was not deceptive, the judge concluded.

Individual liability. J. Paul Reddam, CashCall’s founder, owner, president, and CEO was individually liable for the violations, the judge continued. Reddam also was the president of WS Funding and the owner of Delbert Services. He had complete authority over CashCall’s side of the relationship, he decided what loans to transfer to Delbert Services for collection, and he decided when to end the relationship.

Reddam did not "seriously dispute" that he controlled CashCall’s use of a business lending model that "was intentionally designed to avoid state usury limits and licensing laws," the judge concluded. Reddam had actual knowledge of all of the relevant facts, and his claim that he was relying on his attorney’s advice was unavailing.

The case is No. CV 15-7522-JFW (RAOx).

Attorneys: Barry E Reiferson, Consumer Financial Protection Bureau. Thomas Jerome Nolan (Skadden Arps Slate Meagher and Flom LLP) and Brian J Fischer (Jenner and Block LLP) for CashCall, Inc., Delbert Services Corporation, and WS Funding, LLC.

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

MainStory: TopStory CaliforniaNews CFPB ConsumerCredit DoddFrankAct EnforcementActions InterestUsury UDAAP

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