CFPB Enforcement Win Shows State Usury Limits Matter

In an August 31 ruling, the Consumer Financial Protection Bureau (CFPB) secured a critical win in a suit against California-based payday and installment lender for “servicing and collecting full payment on loans that state-licensing and usury laws had rendered wholly or partially void or uncollectible.”

In an action to enforce the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB filed the suit in 2013 against CashCall and its affiliates, which partnered with another company, WesternSky, and claimed that tribal law rather than state law applied to their loans. The federal court disagreed and dismissed CashCall’s arguments.

In its ruling, the court notes that CashCall and Western Sky admit to making loans at rates that far exceed permissible usury limits in states such as in Arkansas, Colorado, Minnesota, New Hampshire, New York, and North Carolina.  The court further notes that states “have expressed a fundamental public policy in protecting its citizens from usurious loans and unlicensed lenders by enacting statutes that render contracts that violate those policies void and/or uncollectible.”

This August 31 ruling is consistent with a ruling in a recent enforcement action by the Maryland Commissioner of Financial Regulation in which the court also found CashCall to be the true lender in a similarly structured scheme of partnering with banks in efforts to evade state usury limits.   After federal and state regulatory actions have led to the end of this “rent-a-bank” scheme, CashCall migrated to the scheme at issue in the CFPB action.

Diane Standaert, Director of State Policy for the Center for Responsible Lending, issued the following statement:

“States have appropriately moved to enforce rate caps that prevent the outrageously priced loans in this case, which involved loans costing over 135 percent annual interest and upwards of 300 percent.   This important ruling validates the right of states to protect their citizens from predatory loans whether they are made online or at a storefront. It should assure state lawmakers across the country that enacting strong protections, such as usury limits of about 36 percent, is a necessary and effective way to enforce against predatory lending practices.

“The ruling also underscores why states must still enact and enforce strong state laws even as the CFPB engages in its important work to prevent unfair, abusive, and deceptive practices.  In addition, it reinforces the common sense concept that people should not be harassed for debts they do not owe.  Both states and the CFPB must continue to enact protections against unfair lending and collection practices. 

“As the CFPB currently seeks public comment on its proposed payday loan rule, we have called for a final CFPB rule requiring ability to repay assessments for every loan without loopholes or exceptions, particularly for longer-term loans, such as those being made by CashCall.  In line with the court ruling, the CFPB should also deem that making or offering loans in violation of state law is an unfair, abusive, and deceptive practice under federal law.”