Relief awarded in CashCall case is fraction of what CFPB sought

In a blow to the Consumer Financial Protection Bureau, a federal judge rejected the agency's request for over $280 million in penalties against the California lender CashCall, ruling that the lender's violations did not justify such a large fine.

In November, U.S. District Court Judge John F. Walter had ruled in favor of the CFPB, finding that the nonbank lender based in Orange, Calif., had inappropriately sought to circumvent state usury caps by claiming an affiliation with a sovereign Native American tribe, the Cheyenne River Sioux tribe, teaming up with the now-defunct Western Sky Financial in a so-called rent-a-bank scheme.

But in the ruling Friday, Walter said the CFPB had failed to prove that CashCall had deceived customers to the extent that would justify the relief sought by the agency. Instead, he imposed a $10.2 million fine and zero in relief for consumers.

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The CFPB failed to prove that CashCall, a nonbank lender based in Orange, Calif., had deceived consumers who took out unsecured personal loans of $700 to $10,000, U.S. District Court Judge John F. Walter said in a ruling Friday.

"This was a catastrophic setback" for the CFPB, said Thomas J. Nolan, a partner at Latham & Watkins, who represented CashCall. "This is a federal agency that came into a courtroom asking for $280 million in restitution and statutory penalties, and walked out with $10 million."

Although CashCall had collected interest and fees on Western Sky loans that may have been void or unenforceable under state usury and licensing laws, the CFPB was unable to prove that restitution was appropriate, Judge Walter wrote.

The 20-page ruling went into great detail about the legal advice that CashCall had sought to avoid state interest rate caps and regulations, but Walter wrote, "There was no evidence they decided to create and implement an unlawful scheme to defraud consumers, which would have been relatively easy to accomplish given their sophistication and experience in the lending business."

The agency had originally sought $235 million in restitution for consumers. But Walter wrote that the CFPB's only witness "specifically admitted that he did not make any attempt to determine whether [the $235 million] amount was appropriate for restitution."

CashCall and its owner, J. Paul Reddam, are individually liable for the fine. The CFPB declined to comment.

The agency under former CFPB Director Richard Cordray had used a novel legal theory to prosecute CashCall. Because the agency is prohibited by the Dodd-Frank Act from setting interest rate caps, it claimed CashCall had deceived consumers by attempting to collect on loans that were void under state law because of state licensing or usury statutes.

Doing so would be a violation of federal consumer protection statutes prohibiting unfair, deceptive or abusive acts or practices.

Ori Lev, a partner at Mayer Brown, said courts are rejecting the novel legal theories espoused under Cordray.

"The case suggests that parties willing to litigate against the CFPB may achieve success even if they lose on the merits, as courts appear reluctant to award the robust remedies the CFPB typically demands," Lev wrote in a note to clients Monday.

Last week, acting CFPB Director Mick Mulvaney dropped a lawsuit against a group of payday lenders associated with an American Indian tribe, but he did not provide a reason for doing so.