The United States Court of Appeals for the Ninth Circuit, in CFPB vs CashCalldismissed CashCall’s constitutional challenge, upheld the district court’s finding that the defendants and their CEO were liable for engaging in fraudulent practices in violation of the CFPA related to CashCall’s tribal loan program, ordered the district court to amend the amount of the civil penalty to evaluate a higher rank, and cleared up the district court’s denial of restitution.
The CFPB’s lawsuit against CashCall, several of its affiliates and Paul Reddam, CashCall’s CEO, was originally submitted in 2013 before the federal district court in Massachusetts. The CFPB charged the defendants with engaging in fraudulent acts and practices that violate the CFPA based on their efforts to collect loans that were allegedly void in whole or in part under state law because the lender charged excessive interest and/or it failed to obtain a required license. The companies that allegedly funded, purchased, serviced and collected high-yield online installment loans made by a tribal lender did not sue the CFPB. The case was subsequently referred to a California federal district court.
In 2016 the California Federal District Court granted the CFPB’s motion for partial summary judgment and found that since CashCall was the “true lender” of the loans, the defendants had engaged in a fraudulent practice under the CFPA in servicing and collecting the loans by giving the false impression that the loans and the borrowers are enforceable to repay the loans in accordance with the terms of their loan agreements. The district court also ruled that Mr. Reddam was individually liable under the CFPA because he was directly involved in and had the ability to control the conduct of the defendant companies. In 2018, following a trial over the appropriate remedies for the defendants’ CFPA violations, the district court denied the CFPB’s request for a $235 million recovery and $51 million penalty and instead imposed a penalty of $10.3 million using the first tier penalty for violations that are neither reckless nor knowingly.
The Ninth Circuit first dismissed the defendants’ argument that the CFPB lacked authority to commence the enforcement action because of the unconstitutional limitation of the President’s power to remove the CFPB director. Rely on Collins vs. Yellin in which the US Supreme Court ruled that an unconstitutional deportation restriction does not invalidate the agency’s lawsuit so long as the agency chief was properly appointed, the Ninth Circuit ruled that the enforcement action was properly filed under Director Corday. As an alternative basis for challenging the CFPB’s constitutionality, the defendants argued that the funding of the CFPB violated the constitution’s separation of powers by violating the appropriations clause. According to Dodd-Frank, the CFPB receives its funding from CFPB director proposals to the Federal Reserve, not through the Congressional allocation process. Because CashCall had not made the argument “until well after the hearing,” the Ninth Circuit declined to consider it.
Regarding merit, the Ninth Circle observed that “[the tribal entity’s] Involvement in the transactions was commercially non-existent and had no purpose other than to appear that the transactions had a relationship with the tribe.” According to the Ninth Circuit, “the sole reason for the parties’ choice [tribal] Law [in the loan agreements] was to advance CashCall’s plan to circumvent state usury and licensing laws.” The Ninth Circuit Court found that the Circuit Court was correct in both denying the choice of law and applying the law of the borrower’s home state, thereby voiding the loans.
The Ninth Circuit Circuit dismissed CashCall’s attempt to invoke the valid date doctrine, declaring that the loans “were Not valid as there was never any basis for applying tribal law, and they were invalid under the applicable laws of the borrower’s home states. (emphasis included). In response to CashCall’s objection to the circuit court’s conclusion that it was the “true lender” of the loans, the Ninth Circuit Court declared that “[t]o To the extent that CashCall relies on cases involving banks, we note that banks have different considerations as federal law anticipates certain state limitations on the interest rates charged by banks.” Comment that “[w]We don’t consider how the result here might differ if [the tribal entity] had been a bank,” the Ninth Circuit stated that “we need not use the concept of a ‘true lender’, much less establish a general test to identify a ‘true lender’”. Legal questions merely had to consider the “economic reality” of the loans, which “reveal[ed] that the tribe had no material relationship to the transactions.”
The court also rejected CashCall’s argument that a finding of deceptive practice under the CFPA could not be based on a misrepresentation of state law. It found no support for the argument in the CFPA, noting that while the CFPA prohibits the establishment of a national usury rate, the CFPB has not done so here because each state’s usury and licensing laws continue to apply.
The other significant judgments of the Ninth Federal Court were:
- Recognizing the district court’s conclusion that CashCall did not act recklessly as clearly erroneous, the Ninth Circuit reversed the district court’s Tier 1 penalty and placed a pretrial detention with orders to use the higher penalty beginning September 2013 Reassessing Tier 2 punishment requires a determination of recklessness. Based on its review of the facts, the Ninth Circuit Court concluded that the risk that CashCall’s conduct would violate the CFPA as of September 2103 “was so evident that [CashCall] must have been aware of it.’” (quotes omitted)
- The district court made no mistake in holding Mr. Reddam personally liable. It was undisputed that Mr. Reddam, as CEO, had authority to control CashCall’s actions. The Ninth Circuit Circuit denied Mr. Reddam’s attempt to rely on counsel to show that he lacked the necessary mental state for personal liability and found that he had the knowledge necessary for individual liability , because it was reckless to continue collecting loans after 2013.
- The Ninth Circuit Court found that the district court had erroneously relied on its findings that CashCall did not act in bad faith and that consumers received the benefit of their business, and overturned the district court’s denial of refund and ordered a reconsideration. Regarding bad faith, the Ninth Circuit Court noted that scienter is not required for a claim for redress because such a requirement would defeat Congress’ goal of redressing consumers harmed by CashCall’s deceptive practices. It also pointed out that the district court “misunderstood the nature of CashCall’s fraudulent practice” by citing the consumer’s receipt of the benefit of the bargain as grounds for refusing a refund. Regarding the district court’s finding that the CFPB did not determine the appropriate amount of reimbursement because the proposed amount of reimbursement had to be offset against expenses, the Ninth Circuit Court found that this approach was inconsistent with its precedent that allows for assessment of reimbursement by the full amount lost to consumers (i.e. net revenue), rather than a defendant’s gain. The Ninth Circuit typically described “net revenue” as the amount consumers paid for the product or service, less any refunds or chargebacks. He distinguished an attribution of net proceeds from an attribution of net profits, which allows a defendant to deduct expenses, and upheld the decision, stating that “net proceeds might overstate CashCall’s unjustified profits, but if it did, it would.” CashCall’s burden of proof.” (However, the Ninth Circuit Court emphasized that it did not believe that restitution was necessarily appropriate.)