CashCall Case Sends a Message: Online Lenders Can't Collect on Loans that Break State Laws

Just before the holidays, the Consumer Financial Protection Bureau (CFPB) took an important action against CashCall Inc., an online loan servicer, along with its owner, J. Paul Reddam; a subsidiary, WS Funding LLC; and an affiliated company, Delbert Services.  The CFPB found that CashCall and its affiliate were working with an online lending agency called Western Sky, and collecting on loans made by Western Sky that were void because they violated various state interest rate caps or licensing requirements.

The CFPB’s action was important in clarifying that it is against federal law to collect debts that consumers do not owe because the loans are void under state laws. And this in turn is particularly important because absent such decisions, online lenders could undermine abusive-lending laws enacted by state legislatures and/or directly by the voters through ballot measures.

Western Sky, which has suspended operations “as it seeks to resolve the issues it faces in court,” operated out of a Cheyenne Sioux reservation in South Dakota. The company asserted that state laws did not apply to its business because it was based on a reservation and owned by a tribe member. The CFPB affirmed that this relationship “does not exempt Western Sky from having to comply with state laws when it makes loans over the Internet to consumers in various states.” The specific states where the CFPB investigation found violations of licensing requirements and/or interest rate caps were Arizona, Arkansas, Colorado, Indiana, Massachusetts, New Hampshire, New York, and North Carolina. Many such laws include language that specifically declares noncompliant loans to be void; thus, a company like CashCall does not have a legal right to collect on them.

The CFPB asserts that CashCall’s conduct was in violation of federal law, specifically the Consumer Financial Protection Act’s prohibition against unfair, deceptive, and abusive acts and practices. The bureau is seeking monetary relief, damages, and civil penalties from CashCall, while calling on the company to “adhere to all federal consumer financial protection laws, including prohibitions on unfair, deceptive, and abusive acts and practices.”

As CFPB Director Cordray stated in his remarks on the action, “It is unfair to collect money that consumers do not owe on loans that do not legally exist. It is deceptive to trick consumers into repaying illegal loans that state law has nullified in part or in whole. And it is abusive to take unreasonable advantage of a lay person’s lack of understanding when it comes to the application of state and tribal laws.”

— Rebecca Thiess