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Under Fire in 2017: Why the Consumer Financial Protection Bureau May Have More to Worry About Than President Trump

Under Fire in 2017: Why the Consumer Financial Protection Bureau May Have More to Worry About Than President Trump

by: Kyle A. Valente

As 2017 takes hold, the Consumer Financial Protection Bureau (“CFPB”) faces mounting threats to its authority and enforcement powers. Earlier this month, a California federal court granted a motion by CashCall, Inc. (“CashCall”) for an interlocutory appeal concerning an order which found that the company had violated provisions of the Consumer Financial Protection Act of 2010 (“CFPA”).[1] In turn, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) will review four questions of law, two of which could significantly impact the consumer lending industry. These questions include (1) “whether the [CFPB’s] structure is unconstitutional[,]” and (2) whether CFPA violations can be predicated on state law violations.[2] This appellate review comes at a time when the CFPB faces an adversarial administration and Congressional calls to gut the agency.[3]

On August 31, 2016, the U.S. District Court for the Central District of California found that CashCall “service[ed] and collect[ed] full payment on loans that state-licensing and usury laws had rendered wholly or partially void or uncollectible[,]” violating the CFPA, 12 U.S.C. 5536(a)(1)(B).[4]

In the case, the CFPB argued that CashCall employed a “rent-a-tribe” scheme to deliberately avoid state usury laws and charge exorbitant interest rates on consumer payday loans.[5] To do so, CashCall executed lending agreements with Western Sky Financial, LLC (“Western Sky”), a tribal entity owned and operated by “a member of the Cheyenne River Sioux Tribe.”[6] Pursuant to the arrangement, CashCall would purchase all consumer loans originated by Western Sky and subsequently perform all loan-servicing functions on behalf of Western Sky.[7] Furthermore, CashCall would deposit the amount of the loans to be made into an account maintained by Western Sky.[8] Under the “rent-a-tribe” model, borrowers with a below-average FICO scores were issued loans that had APRs ranging from 134.34% to 318.52%.[9]

The CFPB’s theory was that CashCall essentially used Western Sky – and its status as a tribal entity – to circumvent state lending license and usury statutes.[10] CashCall maintained, among other things, (1) that it was not the loan originator, and therefore could not be subject to state lending and usury laws, and (2) that Western Sky, a recognized tribal entity, was the loan originator and had tribal sovereign immunity from such state laws.[11]

To identify the “de facto” or “true lender”[12] the court employed a predominant economic interest test, assessing which party to the loan transactions bore the burden and/or risk.[13] Ultimately, the court held that CashCall was the true lender because numerous provisions in the lending agreements “placed the entire monetary burden and risk of the loan program on CashCall, and not on [Western Sky].”[14]

On December 5, 2016, CashCall moved for an interlocutory appeal, which was granted by the U.S. District Court for the Central District of California on January 3, 2017.[15] In its order, the court agreed with CashCall that all four questions of law warranted review by the Ninth Circuit, including whether the CFPB’s structure is unconstitutional. With respect to this question of law, the court references PHH Corp. v. Consumer Fin. Protec. Bureau, where the Court of Appeals for the D.C. Circuit (“D.C. Circuit”) “vacated the [CFPB’s] order and expressly declined to sanction past or pending Bureau enforcement actions[,]” despite having held that the CFPB’s structure was unconstitutional.[16] The court found that this case was not determinative of the issue at hand because the D.C. Circuit simultaneously offered a remedy to the unconstitutional structure by providing at-will removal of the CFPB Director by the President.[17] Nevertheless, the Ninth Circuit will review the question of law.

Regardless of how the Ninth Circuit rules, online payday lenders and the general FinTech industry will be impacted. Looking ahead to consumer protection from “rent-a-tribe” schemes and other usurious business practices, it appears that states are increasingly following the CFPB’s lead in cracking down on violators. For example, CashCall alone has faced actions brought by attorney generals from four states for violating state usury and lending laws.[18]

In late 2015, West Virginia Attorney General Patrick Morrisey “announced a $13 million settlement with [CashCall] to finally resolve alleged abusive debt collections and usury rates” in violation of state law.[19] Morrisey claimed that CashCall entered into an arrangement with a federally-insured bank and was involved in a “rent-a-bank” scheme to circumvent consumer protection and state usury laws.[20] Although the bank originated the loans, CashCall funded, purchased, and serviced them. After the action was brought, CashCall attempted – albeit unsuccessfully – to claim federal preemption pursuant to Section 27 of the Federal Deposit Insurance Act (“FDIA”).[21] Ultimately, all of the loans were deemed to be void, civil penalties were imposed on CashCall, and the company agreed to pay $13 million to the affected consumers.[22]

Predatory consumer lending cases aside, the year 2017 is certain to see developments in the nation’s regulatory landscape. If federal agencies designed to safeguard consumers are scaled back, then state-action will be necessary to fill the gap.

[1] Statement of Decision Re Defendants’ Motion for Certification of Interlocutory Appeal and Stay Pending Appeal, Consumer Fin. Protec. Bureau v. CashCall, Inc., 15-cv-7522, (C.D. Cal. Jan. 3, 2017).

[2] Id.

[3] Dave Boyer, Consumer Financial Protection Bureau in jeopardy under Donald Trump, The Washington Times (Nov. 29, 2016), http://www.washingtontimes.com/news/2016/nov/29/consumer-financial-protection-bureau-in-jeopardy-u/. See also Kate Berry, The Rocky Road Ahead for the CFPB in 2017, Nat’l Mortgage News (Dec. 27, 2016), http://www.nationalmortgagenews.com/news/compliance-regulation/the-rocky-road-ahead-for-the-cfpb-in-2017-1093690-1.html.

[4] Consumer Fin. Protec. Bureau v. CashCall, Inc., 15-cv-7522-JFW-RAOx, 2016 WL 4820635, at *11 (C.D. Cal. Aug. 31, 2016) (holding that purchaser of small dollar consumer loans was the “true lender” and subject to state usury laws, even though tribal entity funded and closed the loans in its own name).

[5] Id. at *4.

[6] Id. at *5.

[7] Id. at *6-7.

[8] Id.

[9] Id. at *10.

[10] The Subject States are Alabama, Arizona, Arkansas, Colorado, Illinois, Indiana,

Kentucky, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New

Mexico, New York, North Carolina, and Ohio.

[11] “The Bureau is foreclosed from regulating Western Sky loans under well established principles of federal Indian law. Western Sky loans were consummated on the Reservation and are subject exclusively to the laws of the CRST. Even when assigned to a third party, such as WS Funding, the loans remain within the Tribe’s exclusive jurisdiction. Application of state law to the loans—including the Bureau’s indirect application of such laws to the loans—would infringe upon the Tribe’s self governance rights.” Ans. at ¶20, Consumer Fin. Protec. Bureau v. CashCall, Inc., 15-cv-7522, (C.D. Cal. Oct. 7, 2015).

[12] Before its “de facto lender” analysis, the court noted that it had to “determine whether an animal which looks like a duck, walks like a duck, and quacks like a duck, is in fact a duck.” Consumer Fin. Protec. Bureau v. CashCall, Inc., 15-cv-7522-JFW-RAOx, 2016 WL 4820635, at *4 (C.D. Cal. Aug. 31, 2016) (quoting In re Safeguard Self-Storage Trust, 2 F.3d 967, 970 (9th Cir. 1993)).

[13] In identifying the true or de facto lender, courts generally consider the totality of the circumstances and apply a “predominant economic interest,” which examines which party or entity has the predominant economic interest in the transaction. See CashCall, Inc. v. Morrisey, 2014 WL 2404300, at *14 (W.D. Va. May 30, 2014) (affirming the lower court’s application of the “predominant economic interest” test to determine the true lender, which examines which party has the predominant economic interest in the loans); People ex rel. Spitzer v. City. Bank of Rehoboth Beach, Del., 45 A.D.3d 1136, (N.Y. App. Div. 2007) (“Thus, an examination of the totality of the circumstances surrounding this type of business association must be used to determine who is the ‘true lender,’ with the key factor being ‘who had the predominant economic interest’ in the transactions.).

[14] Consumer Fin. Protec. Bureau v. CashCall, Inc., 2016 WL 4820635 at *18; Morrisey, 2014 WL 2404300 at *14 (in reaching its conclusion that CashCall was the true or de facto lender, the lower court found that “numerous provisions of CashCall’s agreements with FB & T placed the entire monetary burden and risk of the loan program on CashCall, and not on FB & T.”).

[15] Statement of Decision Re Defendants’ Motion for Certification of Interlocutory Appeal and Stay Pending Appeal, Consumer Fin. Protec. Bureau v. CashCall, Inc., 15-cv-7522, (C.D. Cal. Jan. 3, 2017).

[16] 839 F.3d 1, 36 (D.C. Cir. 2016); see Statement of Decision Re Defendants’ Motion for Certification of Interlocutory Appeal and Stay Pending Appeal, Consumer Fin. Protec. Bureau v. CashCall, Inc., 15-cv-7522, at *6 (C.D. Cal. Jan. 3, 2017).

[17] Id.

[18] See Patrice Hendriksen, Arkansas AG Settles Payday Lending Lawsuit for $750,000, Consumer Fin. Enforcement Watch (July 7, 2016), http://www.enforcementwatch.com/2016/07/07/arkansas-ag-settles-payday-lending-lawsuit-for-750000/; Amanda Russo, Nebraska AG Settles with Online Lenders for Alleged Deceptive Practices, Consumer Fin. Enforcement Watch (May 6, 2016),

http://www.enforcementwatch.com/2016/05/06/nebraska-ag-settles-with-online-lenders-for-alleged-deceptive-practices/; Matthew L. Riffee, Minnesota AG Settles Suit Against California Online Lender Relating to Alleged “Rent-a-Tribe” Scheme, Consumer Fin. Enforcement Watch (Aug. 24, 2016),

http://www.enforcementwatch.com/2016/08/24/minnesota-ag-settles-suit-against-california-online-lender-relating-to-alleged-rent-a-tribe-scheme/.

[19] N.A., West Virginia Reaches $13 Million Settlement With Payday Lender, Consumer Fin. Enforcement Watch (Dec. 18, 2015), http://www.enforcementwatch.com/2015/12/18/west-virginia-reaches-13-million-settlement-with-payday-lender/.

[20] Id.; CashCall was found to have violated W. Va. Code Ann. § 46A-7-115 (making loans in W. Va. without a license) and § 46A-6-104 (unfair or deceptive acts or practices).

[21] Section 27 of the FDIA, 12 U.S.C. § 1831(d), allows a state-chartered bank to charge whatever interest rates are permitted by its home state and does not require that such a lender obtain a lender license from any state other than its home state.

[22] N.A., supra note 19.