On August 31, Judge Walter of the Central District of California entered summary judgment in favor of the Consumer Finance Protection Bureau (“CFPB”) on its claims against CashCall, Inc. arising out of allegedly unfair and deceptive loan practices. The CFPB had sued payday lender CashCall and various affiliates for violations of the Consumer Financial Protection Act of 2010 (“CFPA”), based on CashCall’s alleged scheme to avoid state usury laws through the use of an online lender formed under a tribal jurisdiction. The decision has implications for the emerging online lending industry, which often relies on one jurisdiction’s usury laws to establish loan terms.

CashCall was found to have originated loans via an organization, Western Sky Financial, that it caused to be created under the laws of the Cheyenne River Sioux Tribe (“CRST”), which does not have usury laws. Western Sky marketed payday and other consumer loans to consumers under contracts containing choice-of-law provisions stating that CRST law governed. Western Sky ultimately provided loans to consumers in 16 states, but after originating the loans, it sold them all to CashCall within about three days of origination and paid CashCall an additional 2.02 percent of the face value of each loan. CashCall did not reject any of the loans Western Sky presented to it for purchase. After the sale, CashCall maintained all rights to the loans and serviced them, although it represented to consumers that it was merely servicing on Western Sky’s behalf. The CFPB alleged that using Western Sky to originate the loans under CRST law allowed CashCall to create loans with interest rates of up to 318.52%, well in excess of the usury caps in the 16 states.

But the CFPB argued, and the court ultimately found, that Western Sky was not the consumers’ true lender. The court based this conclusion on evidence that CashCall hosted the servers on which Western Sky conducted its operations, reimbursed Western Sky for costs related to the server and for its marketing expenses and bank fees, and provided Western Sky with advance funding for its loans. CashCall had also entered into a complete defense and indemnity agreement with Western Sky and obtained a “non-exclusive license” for Western Sky’s name, trademarks, and logos.

Judge Walter found that these circumstances rendered CashCall, not Western Sky, the consumers’ true lender. After finding that CashCall was the true lender, the court found that CRST had no interest in the application of its own law to the consumers’ loan contracts, and that application of CRST law to the loan contracts would violate the public policy of the states where the loans were made. The court found the choice-of-law provision in favor of CRST ineffective, and instead elected to apply the law of each of the 16 states. Because the contracts all violated the states’ anti-usury laws, the court found that they were all unenforceable.

Ultimately, the court found that CashCall and its affiliates violated the CFPA: “By servicing and collecting on Western Sky loans, CashCall and Delbert Services created the ‘net impression’ that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their loan agreements. [. . .] [T]hat impression was patently false—the loan agreements were void and/or the borrowers were not obligated to pay.” CashCall and its affiliates thus engaged in a deceptive practice in violation of the CFPA. In turn, because CashCall’s principal and sole owner “both participated directly in and had the authority to control CashCall’s and Delbert Services’ deceptive acts,” the Court found he was personally liable for CashCall’s misconduct.

This decision casts doubt on lenders’ ability to avoid anti-usury laws simply by causing loan contracts to be entered in states with higher, or non-existent usury caps. Setting aside the unique facts of the CashCall case, this case has implications for on-line lenders’ reliance on choice-of-law provisions in their own loan contracts when setting maximum interest rates on their loans.

The court’s full decision may be found here.