CFPB Now Partnering with States to Rein in Online Lenders

WASHINGTON — The Consumer Financial Protection Bureau's action against a company that bought and serviced loans for Western Sky Financial is the clearest sign yet the bureau sees a significant role for itself in the government crackdown on online lenders.

The CFPB and four state attorneys general on Monday announced a series of actions against CashCall Inc., based in California. State officials say the company violated usury laws through its partnership with Western Sky — a high-cost online lender under intense legal scrutiny — while the CFPB alleges CashCall's collection of payments on invalidated Western Sky loans was "unfair and deceptive."

Government attempts to rein in online lenders for their steep interest rates have to date focused on states, which enforce their own rate caps. But observers say the CashCall case represents the CFPB's clear intent — under authority to punish "unfair and deceptive practices" — to target online lending based on claims that originated in states.

"The most important thing is that the CFPB is now, for the first time, basically piggybacking federal claims off of state law. It means they're putting the full force of the federal government to compel compliance with state law," said Jeremy Rosenblum, a partner at Ballard Spahr who leads the firm's consumer financial services group. "That is a truly a sweeping assertion of jurisdiction by the CFPB."

Authorities say CashCall, and its subsidiary WS Funding acquired loans made by Western Sky — which has claimed immunity from state interest rate caps due to affiliation with a sovereign Indian tribe — and assumed servicing of them.

Whereas the actions announced by attorneys general in Colorado, North Carolina, New Hampshire and Indiana focus on interest rates charged for those loans and licensing issues, the CFPB focused on how CashCall collected the loan payments.

The bureau said that although Western Sky stopped accepting loan applications in September while being targeted in several state investigations, CashCall continued to take out monthly installment payments — automatically withdrawing them from customers' accounts — on loans that were voided as a result of the state probes and used other shady collection tactics.

"All of this conduct violates federal law, specifically the Consumer Financial Protection Act's prohibition on unfair, deceptive, and abusive acts and practices. It is unfair to collect money that consumers do not owe on loans that do not legally exist," CFPB Director Richard Cordray said in a conference call with reporters. "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."

But attorneys for CashCall have vowed to fight the CFPB. In a joint statement, Neil Barofsky, who was the government's special watchdog over the 2008 federal bank bailout, and Katya Jestin argued the bureau is wading into territory reserved for the states.

"The CFPB's charges today against CashCall fly in the face of Congress' clear intent when it plainly and simply declared out of bounds any effort by the CFPB to impose interest rate caps," said Barofsky and Jestin, attorneys at the law firm Jenner & Block. (Jestin has also represented Western Sky.) "Today's action also raises serious questions of what the CFPB is seeking to accomplish by expending resources to file an action that needlessly duplicates and interferes with ongoing state enforcement efforts, and what its director meant when he acknowledged that the CFPB would leave enforcement of state laws governing high interest rate loans to the states."

Yet Cordray, formerly Ohio's attorney general, noted federal officials should have a role since online lending has become "conceptually borderless."

State attorneys general "are often the lead protectors of consumers in their states but as I know from being a former state attorney general, it can be frustrating at times when [a company's] activities go beyond the boundaries of your jurisdiction and I think that the Consumer Bureau can be a helpful partner and ally with them," Cordray said. "That's something we all have agreed on from the beginning. Now we're beginning to make it a reality. And it feels very good."

In addition to CashCall and WS Funding, the CFPB is also suing Delbert Services Corp. in Nevada, an affiliate that collected the loan payments. The suits also name J. Paul Reddam, the owner of all three companies, who previously ran the subprime mortgage lender Ditech.

The CFPB said the loans at issue ranged from $850 to $10,000 and had annual interest rates of about 90% to 343%.

State officials who participated on the joint conference call with the CFPB agreed that collaboration with federal authorities will help their cause.

"We believe today's action by the CFPB and several states [is] a new cooperative strategy to deal with a very serious consumer protection issue," Colorado Attorney General John Suthers said during the call. "I and other attorneys general have watched this product develop and we have come to the conclusion that an ultimate and effective solution to the problem requires a federal presence."

Suthers and other attorneys general have also separately sued Western Sky, arguing that online lenders cannot seek exemptions from laws in one state by claiming they are based on an Indian reservation if loans are being made online to consumers in other states.

Yet Cordray was mum on whether the agency's suit against CashCall signals a similar stance for online tribal lending.

"I don't want to address circumstances that aren't in front of us today … that's something we want to be careful about particularly in the enforcement context," he said. "What we're asserting today is there's a strong basis for an ongoing partnership between us and state attorneys general in this area where they're enforcing state law and we're enforcing federal law violations."