When CashCall lost its battle with the Consumer Financial Protection Bureau over the legality of its nationwide loan program, it lost small.
Now, in the face of an appeal from the bureau, the high-interest lender hopes to stand its ground — and maybe even score a bigger win.
In a brief filed Wednesday with the 9th Circuit Court of Appeals, CashCall argued that the CFPB shouldn’t have been able to bring its case in the first place — and that a lower federal court erred when it found that the company’s founder, lending industry pioneer John Paul Reddam, could be held personally liable for CashCall’s conduct.
The company also argued — like several companies facing scrutiny from the bureau — that the CFPB is unconstitutionally structured.
The filing is the latest wrinkle in what’s already been a years-long legal battle over a nationwide consumer lending business CashCall shut down in 2013 amid scrutiny from the bureau and numerous state regulators over the company’s sky-high interest rates, which sometimes topped 300%.
CashCall was an early provider of fast, expensive online loans to borrowers with bad credit, a business that’s grown into a multibillion-dollar industry largely governed by a patchwork of state laws. Over the years, some lenders — including CashCall — have looked for ways to expand nationwide without having to abide by rules specific to each state.
The case is also notable because the CFPB is continuing to pursue stiff penalties against CashCall even as the bureau has generally taken a more industry-friendly approach over the last year.
The bureau filed its case against CashCall when Obama appointee Richard Cordray, a favorite of consumer advocates, was in charge of the bureau. But the decision to appeal and seek additional penalties came under Trump appointee Mick Mulvaney, who pledged to be friendlier to to the industry. And the case is now continuing under the leadership of Kathy Kraninger, who worked for Mulvaney and took over as the bureau’s director this month.
The bureau, which generally does not comment on pending litigation, declined to comment for this story. Thomas Nolan, a partner at law firm Latham & Watkins who is representing CashCall and Reddam, called it unusual for a federal agency to appeal a case it more or less won, especially given the agency’s new leadership.
“The CFPB continues to commit bureau resources and taxpayer funds pursuing an appeal which also advances positions that are inconsistent with numerous public pronouncements of a new and enlightened enforcement policy,” Nolan said.
The bureau sued CashCall in 2013, alleging that the company — through another firm, Western Sky, based on tribal land in South Dakota — made hundreds of millions of dollars in loans at interest rates that sometimes topped 300% and were illegal in many states. In the case filed in federal court in Los Angeles, the bureau argued that, by collecting on those loans, CashCall had engaged in an unfair, deceptive or abusive practice in violation of federal consumer protection law.
CashCall said it had made loans through Western Sky because it believed that the company’s location on tribal land would mean that the loans would not be subject to state lending laws. The CFPB, and Judge John F. Walter, disagreed. Walter ruled in 2016 that CashCall, not Western Sky, was the real lender, that the loans were subject to state law and that the loans were therefore illegal.
Walter also ruled that, by collecting on the loans, CashCall had deceptively given borrowers the “patently false” impression that the loans were valid.
The ruling, handed down in 2016, looked like a clear win for the CFPB, but Walter’s final judgement, issued in January, was relatively favorable to CashCall.
Walter said that although CashCall had broken the law, it had not done so knowingly or recklessly. Based on that ruling, he ordered the company to pay penalties of $10.3 million, not the nearly $52 million the CFPB had sought. What’s more, Walter said, CashCall should not have to pay more than $200 million in restitution to borrowers who took out its illegal loans.
Walter reasoned that CashCall and Western Sky fully disclosed loan terms — including triple-digit interest rates and high fees — and that, even if the loans were illegal, borrowers were not duped.
The CFPB in April said it would appeal the judgment to the 9th Circuit. In an October appellate brief, the bureau argued that letting CashCall off the hook with a mere $10.3 million penalty and not ordering it to pay restitution would set a bad precedent.
“Under the district court’s decision, defendants get to keep hundreds of millions of dollars that they unlawfully took from consumers while paying only a $10.3 million penalty,” attorneys for the bureau wrote in the filing. “That result undeniably leaves companies with little incentive to follow the law.”
The bureau also argued in the appellate filing that Walter did not have the authority to deny restitution, though the filing notes that the bureau took a different position in the lower court case and said the matter of restitution would be left to the judge. CashCall, in its filing, seized on that change, saying the bureau tried a strategy, lost and now wants a mulligan.
“No ‘do over’ should be afforded,” the company wrote in its filing, which argued Walter had the authority to deny restitution.
CashCall and Reddam also filed a cross-appeal in the case, arguing that the CFPB is unconstitutional, that it overstepped its authority to bring the case in the first place and that Walter was wrong to say Reddam should be held personally liable.
Nolan said his clients will drop that cross-appeal if the 9th Circuit upholds Walter’s original judgment ordering just $10.3 million in penalties.
CashCall joins a handful of finance companies that have challenged the constitutionality of the CFPB, arguing that the agency — which is run by a lone director who can only be fired for cause — has too much power and not enough oversight from either Congress or the White House.