LOS ANGELES (Legal Newsline) - A Los Angeles federal judge’s ruling against CashCall Inc. over alleged predatory lending practices is a win for consumers, an expert in responsible lending says.
“The court’s decision is a huge victory for consumers in helping enforce laws that are in place to protect against high-cost lending practices,” Diane Standaert, director of state policy at the Center for Responsible Lending, told Legal Newsline.
The ruling in Consumer Financial Protection Bureau v. CashCall Inc., granted the CFPB summary judgment on the issue of liability. The CFPB alleged CashCall violated the Consumer Financial Protection Act of 2010 by offering loans with exorbitant interest rates, some as high as 300 percent, exceeding state usury laws in the process.
In these lending agreements, customers took out loans online or over the phone through Western Sky, a financial company under the jurisdiction of Cheyenne River Sioux tribal law. Once loans were processed, CashCall, a separate entity, purchased and backed them.
Western Sky did handle loan transactions, but it was CashCall that serviced and collected on the loans, a move that gave customers the impression payments were required and that their loans were legitimate.
The court found that in most cases, CashCall had not even secured consumer lending licenses in a majority of the states they were operating in.
In his ruling, District Judge John F. Walter focused on who was the “true lender.”
CashCall argued the CFPB’s effort to establish a test to determine “true legal lenders” put the company on the spot.
Experts say the decision against CashCall may protect some consumers, but it won’t necessarily solve predatory lending practices.
“One thing we know about the lending industry is that they are very persistent in seeking and exploiting potential loopholes,” Standaert said.
“They’ve tried it with rent-a-banks, they’ve tried it with credit services organizations, and here they were trying it with a tribal lending entity, so it is something that has appeared in multiple forms over many years and each time there have been efforts to successfully enforce against these schemes designed to evade consumer protection.”
Payday lenders continue to evolve, but Standaert says this ruling is timely, as it comes in the wake of the CFPB seeking public comment on its first draft of national rules for payday lending.
“Payday loans are marketed as a quick financial fix, but in reality create a long-term debt trap that can lead to a cascade of harms like bank penalty fees, increased likelihood of overdraft when they are paying their bills,” Standaert said.
“It’s because of these harms that 14 states and the District of Columbia enforce strict usury limits to protect against these high-cost loans.”
The “true lender” determination does present new questions in regards to a variety of lending arrangements, but Standaert says it provides “an opportunity for the agency (CFPB) to deem that loans made in violation of state laws, are in violation of the federal unfair, abusive and deceptive act.”