In the most recent development in the CFPB’s two-year-old lawsuit alleging unfair, deceptive, and abusive practices by several online lenders, on September 23, 2015, Massachusetts U.S. District Judge George O’Toole, Jr., granted a motion transferring the CFPB’s suit from the District of Massachusetts to the Central District of California.
The case, Consumer Financial Protection Bureau v. CashCall, Inc. et al., is the first action brought by the Bureau against an online lender. In its complaint, the CFPB alleges that three California-based companies violated the Consumer Financial Protection Act (CFPA) by seeking to collect on loans that were void or partially nullified under state law. Several states have laws that render small-dollar loans void if they exceed a maximum interest rate or were made without a consumer-lending license. Under these laws, the lender has no right to collect from consumers, and consumers have no obligation to repay.
The CFPB’s complaint implicates laws from 16 states and alleges, among other things, that the defendants engaged in “abusive” practices by taking unreasonable advantage of consumers’ lack of understanding about the impact of these laws on the parties’ rights and obligations regarding the loans—basically by repeatedly telling borrowers they were required to repay the loans.
According to the complaint, CashCall and WS Funding entered into an agreement with Western Sky Financial where loans were made in Western Sky’s name, but funded by WS Funding, and then almost immediately sold to WS Funding and serviced and collected by CashCall and Delbert Services Corp. Western Sky is owned by a member of the Cheyenne River Sioux Tribe, and the loan agreements stated that the loans were “subject solely to the laws and jurisdiction of the Cheyenne River Sioux Tribe” and therefore exempt from state law.
CFPB director Richard Cordray said that hundreds of thousands of loans were made using this scheme in amounts ranging from $850 to $10,000 and with interest rates from 90% to 343%. The agreements also permitted CashCall to debit a specified monthly installment amount directly from borrowers’ bank accounts.
The CFPB’s argument that the loans were subject to state law relies on allegations that Western Sky is owned by a member of an Indian tribe, but not owned or operated by a tribe or tribal entity, and is organized as an LLC under South Dakota law, as opposed to under tribal law.
Several state courts have held that sovereign immunity does not apply to lawsuits involving tribal lenders because the challenged activity took place away from tribal lands, in states where the loans were considered illegal, and because the entities sought to evade state licensing and usury laws. However, in a case currently on appeal, a California Court of Appeal held that payday lenders owned by federally recognized Indian tribes were immune from suit from the state under the “arm-of-the-tribe” doctrine.
In his order granting the defendants’ motion to transfer venue, Judge O’Toole found the Central District of California to be a “substantially more convenient forum” for the case. Judge O’Toole stated that the “alleged illegal activity at the heart of this case was apparently managed from within the Central District,” where a majority of the defendant-companies’ employees reside and where the companies perform most of their business and house most of their corporate records. “In contrast, there is no strong (if any) reason why Massachusetts would be a more appropriate forum. Massachusetts is one of sixteen states whose laws and public interests are implicated by the [CFPB’s] complaint, and its interests seem relatively minor in comparison to other involved states.”
Aside from addressing the tribal immunity issue, the case’s bigger impact could be in clarifying how the CFPB defines and how courts interpret what constitutes “abusive” practices under the CFPA. Before the creation of the CFPB, regulators could challenge “unfair” or “deceptive” acts and practices, but the Dodd-Frank Act also allows the CFPB to challenge “abusive” practices. Few cases have had occasion to address the scope of what constitutes abusive practices and how those differ from unfair or deceptive practices. That may change soon. In addition to the CashCall suit, the CFPB is presently pursing an “abusive practices” theory against another online lender in Consumer Financial Protection Bureau v. NDG Financial Corp. et al., case number 1:15-cv-5211, filed in July 2015 in the Southern District of New York.