What do Arkansas, Colorado, Connecticut, Florida, Georgia, Iowa, Maryland, Massachusetts, Minnesota, New Hampshire, New York, North Carolina, Pennsylvania, Washington and West Virginia all have in common? None of them are particularly fond of California-based, online lender CashCall, Inc.
Each state has pursued civil or administrative action against CashCall and in some cases the company’s affiliates, WS Funding and Delbert Services. In December of 2013, the federal government got in on the action as the Consumer Financial Protection Bureau (CFPB), the regulatory body established in 2012 to help better protect consumers, filed a lawsuit against CashCall and its affiliates.
At issue for the CFPB and the numerous states mentioned above are the various usury and licensing laws enacted by the respective states, laws that CashCall ignored when they made consumer loans over the internet without a license to do so and with accompanying annual interest rates in excess of 350% in some cases.
In an attempt to circumvent these pesky regulations CashCall engaged in what is commonly referred to as a “rent-a-tribe” scheme whereby CashCall partnered with a company affiliated with a Native American Tribe, in this case Western Sky Financial (WSF), to take advantage of said company’s “tribal sovereign immunity.” The idea being that Western Sky Financial, a loan company owned by a member of the Cheyenne River Sioux Tribe and located on a reservation in South Dakota, isn’t bound by state law but rather governed by the authority of the tribe and could thus issue loans in violation of state laws.
According to the CFPB lawsuit, and in accordance with findings by numerous states and their respective attorney generals, CashCall and WS Funding “entered into a series of agreements with Western Sky to secure high-cost, consumer-installment loans that—purportedly—did not have to comply with state law (WS Loans).” The CFPB lawsuit continues, “Under these agreements, WS Loans were made in Western Sky’s name, but marketed by CashCall, financed by WS Funding, almost immediately sold and assigned to WS Funding, and then serviced and collected by CashCall, Delbert, or both.”
Under this guise, CashCall attempted to collect on loans with interest rates ranging from 89% to over 350%.
The Order to Cease and Desist issued by the New Hampshire Department of Banking does a wonderful job of fleshing out CashCall and Western Sky’s scheme, concluding that “Western Sky is nothing more than a front to enable CashCall to evade licensure by state agencies and to exploit Indian Tribal Sovereign Immunity to shield its deceptive business practices from prosecution by state and federal regulators.”
This isn’t CashCall’s first attempt to skirt the law through questionable means. In 2006 CashCall engaged in a similar arrangement with an FDIC insured bank to evade licensing and usury laws in West Virginia. In 2008 though, the State’s attorney general challenged CashCall’s “rent-a-bank” scheme and in 2012 a judge ruled in favor of the State’s on all of its claims against CashCall, issuing a $13.8 million judgment against CashCall. This summer the West Virginia Supreme Court affirmed the ruling.
Here in California though CashCall doesn’t need to jump through such hoops to issue loans with triple digit interest rates. Because CashCall is a licensed finance lender in the state of California, and California’s Finance Lenders Law exempts licensees from the usury provision of the California Constitution for loans above $2,500, CashCall is able to charge interest rates that other states have taken the company to court for. Historically, CashCall has charged between 96% and 135% on a$2,600 loan to California consumers. Currently, their website offers a $2,600 loan at a maximum annual percentage rate of 204% for a California borrower.
The supposed benefit in deregulating small dollar consumer loans, such as the ones issued by CashCall, is that it will open up credit lines to sub-prime borrowers who otherwise may not have access to credit. The logic is that by removing interest rate caps for loans above $2,500 licensed lenders will be more likely to lend to sub-prime borrowers, as higher interest rates will allow them to absorb the costs of higher default rates.
But the sub-prime borrowers who supposedly benefit from this arrangement often find themselves in an economic deal with the devil. They gain access to a loan but find themselves burdened with a repayment plan they can’t afford. CashCall borrowers who carry the loan to term often end up paying back at minimum nearly four times what they initially borrowed, often making hundreds of dollars in payments that go almost entirely towards interest for months, if not years, on end. Because of this, many of CashCall’s customers find themselves in greater financial straits then when they originally sought a loan in the first place, with roughly 45% of CashCall borrowers defaulting on their loans according to the company’s CFO.
And because of California’s legal framework, advocating on behalf of consumers who find themselves struggling under the harsh conditions of a CashCall loan is challenging.
In 2008, when the Law Office of Arthur Levy, the Sturdevant Law Firm and other consumer rights attorneys filed the De La Torre class action lawsuit against CashCall on behalf of California consumers, they couldn’t rely on a state usury limit, as those in other states had done. Instead, Mr. Levy and his fellow counsel made the argument that “by making loans at rates of interest and on other terms that are unconscionable in light of the financial circumstances of the borrowers” and “which fail to accurately and fairly represent the characteristics and benefits of the loans,” CashCall’s loans violated California’s Unfair Competition Laws, among other claims.
Yet, in spite of the fact that California consumers are clearly being harmed by CashCall’s loan products (a quick online search of CashCall’s customer experiences can attest to this) the argument presented on their behalf has encountered difficulties in the court. Initially, the judge in the De La Torre case saw fit to validate plaintiffs’ claims when she rejected CashCall’s Motion for Summary Judgment, which would have effectively thrown the unconscionability claim out the window. However, when CashCall filed a motion for the judge to reconsider her ruling, the Court decided that it could not award borrowers any relief because to do so would be impermissible “economic regulation,” leaving plaintiffs and class members out in the cold.
Mr. Levy and his co-counsel intend to strenuously counter this ruling. They have obtained leave to file an immediate appeal to the Ninth Circuit Court of Appeals. If the Ninth Circuit ultimately rules against the lower court’s judgment, the class-action against CashCall’s unconscionable loans will establish a precedent in the case law which could make it easier to protect borrowers in the future from predatory lending practices like the ones at issue here.