In a decision that may have far-reaching ramifications for other lenders, a judge in the U.S. District Court for the Central District of California recently held that high interest consumer loans originated by a tribal lending entity formed by the Cheyenne River Sioux Tribe were actually made by California-based, CashCall, Inc., and as such were subject to regulation by the Consumer Financial Protection Bureau (CFPB). Since CashCall – and not the Indian tribe – was the “true lender,” the consumer lending laws of the borrowers’ home states, which prohibited the high-interest loans, applied, indicated the court. As a result, CashCall’s servicing and collection efforts were deemed to have violated the Dodd-Frank Act ban on unfair, deceptive, or abusive acts or practices (see CFPB v. CashCall, Inc., Aug. 31, 2016, Walter, J.).
Totality of the Circumstances Test Used By Court
Judge Walter reached his decision using the so-called “totality of the circumstances” test to determine which party actually had the “predominant economic interest” in the transaction. Legal experts note that other courts have utilized different standards to who is the “true lender.” For example, some courts merely look to what entity is designated as lender in the loan agreement papers. Others have centered their focus on an examination of which party engages in the three non-ministerial acts:
• The determination to extend credit
• The extension of credit itself
• The disbursement of funds resulting from the extension of credit
CashCall Controlled the Entire Lending Scenario
Judge Walter found that it was CashCall and not the Tribe that controlled the entire business process. For example, CashCall “purchased” the loans prior to the first payment due date. It covered most of the Tribe’s operating costs and agreed to indemnify the Tribe against any civil, criminal, or administrative claims. While consumers used the Tribe’s website and telephone number to initiate the loan process, CashCall hosted servers on which the online applications were made. CashCall serviced the loans and, if a loan went into default, the loan was transferred to a CashCall entity for collection purposes.
Decision May Affect Marketplace (Peer to Peer) Lending
The CashCall decision offers at least indirect support for the CFPB’s recent proposal to subject non-bank marketplace lenders to its supervision. While the Dodd-Frank Act directed the CFPB to supervise various categories of lenders (e.g., mortgage lenders and services, private education lenders, and payday lenders), it also allows expansion of CFPB’s supervision in other consumer markets. Reports indicate the Bureau has its sights on marketplace lenders, such as the Lending Club.
There is also some question, in light of Judge Walter’s ruling, about the continuing ability of a community bank to “export” the interest rate of its home state without regard to the varied usury laws of the 50 states.
Lending Practices Continue to Face Scrutiny at State and Federal Levels
Today, lenders face a host of disparate legal and regulatory rules. The legal landscape can appear like a minefield. Maneuvering through that minefield can best be accomplished by retaining experienced, skilled business attorneys and litigators. The law firm of CKB VIENNA LLP has provided legal and business consultation to commercial and consumer lenders, mortgage originators, mortgage servicing companies, and other lending entities for years. We have extensive experience with FCRA and Truth in Lending rules. We are conversant in the sort of “techno speak” found in Dodd Frank. Our firm is also skilled in all forms of litigation, should that need arise. CKB VIENNA has offices in Rancho Cucamonga, San Bernardino, and Los Angeles. Contact us by telephone at 909.980.1040 or complete our online form.