Consumer Financial Protection Bureau v. CashCall, Inc., Case No. CV 15-07522-JFW (C.D. Cal. Jan. 19, 2018). 

On January 19, 2018, the United States District Court for the Central Division of California held that the CFPB was entitled to recover statutory fees, but not restitution, against financial services provider, CashCall, Inc. As background, CashCall, Inc. was founded by a co-defendant in the case, Paul Reddam, to provide unsecured consumer loans. The financial crisis of 2008 severely limited the ability of banks to engage in lending activity, which included partnerships with unsecured lenders such as CashCall. Thus, CashCall ended its unsecured consumer loan business and entered the mortgage loan business. CashCall’s mortgage business was very successful, and it was ultimately sold in 2015.

Seeking to diversify its lending, CashCall was advised to become involved in a Tribal Lending Model in which a lender operating on an Indian reservation would make loans to borrowers and then assign the loan to a non-tribal financial services company like CashCall for servicing and collection. CashCall was advised that the loans would be made under the laws of the tribe and would not have to comply with licensing and usury laws in states where borrowers resided. CashCall went into business with Western Sky Financial LLC, whereby Western Sky would make loans to consumers, and after three days, these loans would be purchased by a subsidiary of CashCall for servicing of the loan. These entities created what would be called the Western Sky Loan Program. Borrowers’ Consumer Loan Agreement in the Western Sky Loan Program were told that their loans were governed by the Indian Commerce Clause of the Constitution of the United States and the laws of the Cheyenne River Sioux Tribe. The Consumer Loan Agreement also stated, “Neither this Agreement nor Lender is subject to the laws of any state of the United States of America.”

Although CashCall believed it was not subject to federal consumer protection law or state limiting rates due to the tribal immunity doctrine, federal and state regulators disagreed. In 2011, the state of Washington filed an enforcement action against CashCall, alleging violations of state law based on CashCall’s servicing of Western Sky loans. Others states followed, and in 2013, the CFPB filed a Complaint alleging that CashCall and others involved had engaged in unfair, deceptive, and abusive acts and practices in violation of the Consumer Financial Protection Act (“CFPA”). In 2016, the CFPB filed a Motion for Partial Summary Judgment as to liability only, which was granted.

Thus, the only issue remaining before the Court was the appropriate remedy for Defendants’ violations of the CFPA. The CFPB sought restitution in the amount of $235,597,529.74 and statutory penalty in the amount of $51,614,708.

While restitution is permissible under the CFPA, it is not required. Instead, the CFPB bears the burden of proving (1) that restitution is an appropriate remedy and (2) that the amount of restitution it seeks represents a defendant’s unjust gains. As for the first element, the Court explained that restitution is an appropriate remedy when a defendant uses a scheme to defraud using fraudulent misrepresentations to trick consumers into believing they are purchasing something other than that which they actually receive. Because the CFPB did not show that the Defendants intended to defraud consumers or that consumers did not receive the benefit of their bargain under the Western Sky program, the court found that restitution was not an appropriate remedy. The Court held that establishing a company to avoid state licensing and usury laws is not sufficient to show fraud, as companies try to structure businesses to avoid unfavorable laws and regulations all the time. As for the second prong, even if the CFPB had satisfied the first element, the Court found that the CFPB did not present evidence that $235,597,529.74 was the appropriate amount of restitution based on Defendants’ unjust gains.

Although restitution was not permitted, statutory penalties were imposed. The Consumer Financial Protection Act (“CFPA”) provides: “Any person that violates, through any act or omission, any provision of Federal consumer financial law shall forfeit and pay a civil penalty ....” 12 U.S.C. § 5565(c)(1). The Act permits penalties based on the violating party’s mental state: no more than $5,000 per day for no mental state, no more than $25,000 per day if the defendant acted recklessly, or no more than $1,000,000 if the defendant acted knowingly. Although the CFPB argued that CashCall acted knowingly, the Court found that CashCall did not act knowingly or recklessly. According to the Court, the evidence showed that there was no case law at the time clearly establishing that the Tribal Lending Model was not lawful. At best, the Court found, CashCall’s actions were risky and nothing more. Accordingly, the court imposed a penalty in the amount of $10,283,886.00 based on a Tier One penalty: no more than $5,000 per day with no mental state involved.