Arguing that CashCall was the "True Lender", CFPB Successfully Challenges High Interest Loan Program

On August 31, a federal district court in California ruled in favor of the U.S. Consumer Financial Protection Bureau (CFPB) on the application of "true lender" principles in the context of a tribal lending arrangement. The court found that the defendant, CashCall, Inc., was the de facto lender of so-called "payday loans" originated by a tribal entity called Western Sky Financial. Although the decision's applicability in other contexts remains unclear, it does represent the latest entry in the developing case law on true lender issues, and the case signals increasing scrutiny of consumer lending arrangements by federal regulators.

The CFPB sued CashCall in December 2013, alleging that CashCall had engaged in unfair, deceptive, and abusive acts and practices under Federal law in violation of the Consumer Financial Protection Act of 2010, 12 U.S.C. § 5536(a)(1)(B), by collecting on loans with interest rates above the usury caps in the borrowers' home states. CashCall is a California-based consumer lending platform that offers high-interest loans to borrowers who reside in various States. CashCall claimed that it did not itself originate the loans. Instead, CashCall argued, it has a contractual relationship with Western Sky Financial pursuant to which Western Sky acts as the nominal lender on the loan agreements, and CashCall agrees to purchase and service the loans. The loan agreements include a choice-of-law provision that states that the law of the Cheyenne River Indian Reservation applies to the loans.

CashCall argued before the district court that the choice-of-law provision foreclosed the application of any State law usury cap to the loans. The district court disagreed, disregarding the choice-of-law provision and applying the law of the borrowers' respective home States to the loans. It did so principally on the basis of its finding that CashCall, and not Western Sky, was the "true lender" on each of the loans. Because California-based CashCall was the de facto lender, the court reasoned, there was no reason to apply tribal law to the loan transactions, and State usury law instead applied.

In reaching its conclusion that CashCall was the true lender, the court applied a totality-of-the-circumstances test focused on which party—CashCall or Western Sky—had the "predominant economic interest" in the loans. It found most important that Western Sky carried no monetary risk at any time. The court noted that, under the parties' agreements, CashCall deposits sufficient funds in a reserve account for Western Sky to fund the loans, that CashCall purchases every loan from Western Sky before any payments are made on the loan, and that CashCall bears the entire risk of default.

Although the district court's reasoning is relatively sparse, its decision is nevertheless noteworthy for several reasons.

• The court's reliance on the true lender doctrine suggests an expanding role for that mode of analysis in the context of consumer lending arrangements.
• The court's adoption of the "predominant economic interest" standard adds another voice favoring that approach. The court acknowledged in a footnote that other courts have applied standards under which it is more difficult to establish that an entity other than the originator of the loan is the true lender. These courts have focused more on the point of origination and on which party sets lending criteria or terms. But without offering any analysis, the court declined to follow these standards.
• The case itself reflects increasing scrutiny from regulators, and demonstrates willingness to use novel legal arguments to target what regulators view as predatory lending.

There are also several factors that caution against a broad reading of the decision's scope.

• The case does not squarely implicate Federal preemption analysis, which could have dictated a different result. CashCall did not argue that Western Sky's charter entitled Western Sky or CashCall to rely on the preemption provisions of the National Bank Act or the Depository Institution Deregulation and Monetary Control Act. And Western Sky was not a party in the case at all, so even issues concerning tribal immunity from State law were largely absent from the case. The court therefore did not grapple with the interaction between true lender analysis and Federal preemption.
• CashCall's practices and lending model have been the subject of considerable litigation over the past several years, in several jurisdictions. Western Sky shuttered in 2013 amidst similar scrutiny (as reported by the Washington Post). The court in this case, moreover, noted that the loan products at issue included some at rates as high as 318.52%. These factors may have contributed to the CFPB's decision to bring this case, as well as to the result reached by the court based on a somewhat truncated analysis.
• Finally, the decision is likely to be appealed to the Ninth Circuit, which could find that the district court erred in either its adoption of the "predominant economic interest" standard or its application of that standard. Although it is difficult to predict how the Ninth Circuit will view the issues, the appeal seems certain to garner attention in the consumer lending space. Players in that space may file amicus briefs providing additional perspective to the court, which could influence the court's approach to the issues.