CFPB Suit Targets Predatory Online Lending Practices
The CFPB is setting an important precedent, suggested Mark Williams, a former Federal Reserve Bank examiner. "More and more, we are seeing financial products migrate to the Internet, so it is very important that regulators like CFPB take this stand," Williams said. "The bureau was created as a result of financial crisis, and its role is very broadly written to protect consumers."
The Consumer Finance Protection Bureau this week put online finance companies on notice that it will not overlook them merely because they operate in cyberspace. Specifically, the bureau sued CashCall for collecting money consumers allegedly did not owe.
In its suit, the bureau charged that CashCall and its affiliates engaged in unfair, deceptive, and abusive practices, including illegally debiting consumer checking accounts for loans that were void.
CashCall and the associated companies are reportedly owned by J. Paul Reddam, a race-horse owner and philosophy professor-turned-businessman.
Beginning in late 2009, CashCall and its subsidiary, WS Funding, entered into an arrangement with online lender Western Sky Financial, according to the CFPB. Western Sky Financial has asserted that the laws in the state in which it is based -- South Dakota -- did not apply to it because it was based on an Indian reservation and owned by a member of the Cheyenne River Sioux Tribe.
The CFPB maintains Western Sky still must comply with state laws when it makes loans over the Internet to people in other states.
The loans ranged from US$850 to $10,000 and came with upfront fees, lengthy repayment terms and annual interest rates from nearly 90 percent to 343 percent, the CFPB said. Many of the loan agreements allowed payments to be debited directly from the borrower's bank account.
By September 2013, Western Sky had become the subject of several states' investigations and court actions, and it began to shut down its business. CashCall and its collection agency, Delbert Services, continued to take monthly installment payments from consumers' bank accounts or otherwise sought to collect money from borrowers.
After its own investigation, the bureau concluded that the high-cost loans violated either licensing requirements or interest-rate caps, or both, in Arizona, Arkansas, Colorado, Indiana, Massachusetts, New Hampshire, New York and North Carolina, meaning the consumers did not owe that money that was being collected.
As part of its suit, the CFPB is seeking monetary relief, damages, and civil penalties.
The CFPB did not respond to our request for further details.
'An Important Precedent'
By taking on an online servicer and lender, the CFPB is setting a very important precedent, Mark Williams, a former Federal Reserve Bank examiner who teaches finance in the Boston University School of Management, told CRM Buyer.
"More and more, we are seeing financial products migrate to the Internet, so it is very important that regulators like CFPB take this stand," Williams said.
There is no doubt that the CFPB has the mandate to pursue CashCall, he added.
"The bureau was created as a result of financial crisis, and its role is very broadly written to protect consumers," Williams pointed out. "My concern would be if CFPB didn't take this move -- that might show it was not being aggressive enough."
While there might not be much controversy over the CFPB's suit against an online lender, CashCall is certainly defending itself using other arguments.
Clearly, the action falls within the CFPB's broad mission of protecting consumers from predatory behaviors in the financial services industry, asserted David Reiss, a professor of Law at Brooklyn Law School.
However, CashCall's attorneys, Neil Barofsky and Katya Jestin, have said that the CFPB does not have a mandate to impose rate caps.
"Of all of CashCall's arguments, this one seems particularly weak," Reiss concluded, "as the CFPB is just seeking to enforce existing state laws that have been allegedly violated across the country."