The United States Court of Appeals for the Ninth Circuit, in CFPB versus CashCalldismissed CashCall’s constitutional challenge, upheld the district court’s finding that the defendant companies and its CEO were liable for engaging in deceptive practices in violation of the CFPA in connection with CashCall’s tribal loan program , ordered the district court to reassess the amount of the civil penalty using a higher level and set aside the district court’s denial of restitution.

The CFPB lawsuit against CashCall, several related companies and Paul Reddam, CEO of CashCall, was originally filed in 2013 in the Federal District Court of Massachusetts. The CFPB alleged that the defendants engaged in deceptive acts and practices in violation of the CFPA as a result of their efforts to collect loans allegedly void in whole or in part under state law because the lender has charged excessive interest and/or failed to obtain the required license. . The companies allegedly funded, purchased, managed and collected high-rate installment loans online from a tribe-affiliated lender that the CFPB did not prosecute. The case was later transferred to a federal district court in California.

In 2016, the California Federal District Court Grants CFPB’s Motion for Partial Summary Judgment and held that since CashCall was the “true lender” of the loans, the defendant companies had engaged in a deceptive practice within the meaning of the CFPA when servicing and collecting the loans by creating the false impression that the loans were enforceable and that borrowers were required 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 participated directly in and had the ability to control the conduct of the corporate defendants. In 2018, following a trial en banc on appropriate remedies for the defendants’ CFPA violations, the district court denied the CFPB’s request for $235 million in restitution and a $51 million fine. dollars, and instead awarded a fine of $10.3 million, using the first tier penalty amount for violations that are neither reckless nor knowing.

The Ninth Circuit initially rejected the defendants’ argument that the CFPB lacked the power to sue because of the unconstitutional limit on the president’s power to remove the CFPB director. Resting on Collins vs. Yellin in which the United States Supreme Court ruled that an unconstitutional removal restriction did not invalidate the agency’s action as long as the head of the agency was properly named, the Ninth Circuit ruled that the relief measure The execution had been validly deposited under the director Corday. As an alternative basis for challenging the constitutionality of the CFPB, the defendants argued that the funding of the CFPB violates the constitutional separation of powers by violating the appropriations clause. In accordance with Dodd-Frank, the CFPB receives its funding through requests made by the CFPB director to the Federal Reserve rather than through the congressional appropriations process. Because CashCall had not raised the argument “until long after the closing argument”, the Ninth Circuit declined to consider it.

Moving on to the merits, the Ninth Circuit determined that “[the tribal entity’s] involvement in transactions was economically non-existent and had no purpose other than to make the transactions appear to be related to the tribe. According to the Ninth Circuit, “the only reason the parties chose to [tribal] right [in the loan agreements] was to pursue CashCall’s plan to avoid state usury and licensing laws. The Ninth Circuit found that the District Court was correct in refusing both to give effect to the choice of law provision and to apply the law of the borrowers’ home states, thereby invalidating the loans.

The Ninth Circuit rejected CashCall’s attempt to invoke the doctrine of validity when made, stating that the loans “were not valid when made as there had never been a basis for applying tribal law in the first place, and they were invalid under the applicable laws of the borrower’s home states. (emphasis included). In response to CashCall’s objection to the district court’s finding that it was the “true lender” of the loans, the Ninth Circuit said that “[t]To the extent that CashCall invokes cases involving banks, we note that banks present different considerations because federal law prevents certain state restrictions on the interest rates charged by banks. Commenting that “[w]We do not consider how the result here might differ if [the tribal entity] had been a bank”, the Ninth Circuit said that “we need not employ the concept of ‘genuine lender’, much less establish a general test for identifying a ‘genuine lender’. “In his view, for the purposes of the choice of law issue, it was sufficient to consider the “economic reality” of loans which “reveal[ed] that the tribe had no substantial connection to the transactions.

The court also rejected CashCall’s argument that a deceptive practice finding under the CFPA could not be based on deception about state law. He found no support for the CFPA’s argument and noted that while the CFPA prohibits the establishment of a national attrition rate, the CFPB had not done so here because the laws on wear and individual state licenses still applied.

Other important decisions of the Ninth Circuit were:

  • Finding that the district court’s finding that CashCall did not act recklessly was patently erroneous, the Ninth Circuit set aside the level one penalty imposed by the district court and remanded with instructions to reevaluate it for the period commencing in September 2013 using the higher level two sentence. this requires a statement of carelessness. Based on its review of the facts, the Ninth Circuit concluded that as of September 2103, the danger of CashCall’s conduct violating the CFPA was “so evident that [CashCall] should be aware of it.’ (quotes omitted)
  • The District Court did not err in holding Mr. Reddam personally liable. It was undisputed that Mr. Reddam had the power, as CEO, to control the actions of CashCall. The Ninth Circuit rejected Mr. Reddam’s attempt to rely on counsel’s advice to show that he lacked the mental state necessary for personal liability and concluded that because continuing to recover loans after 2013 was reckless, he qualified for individual responsibility.
  • Finding that the District Court erroneously relied on its findings that CashCall did not act in bad faith and that consumers benefited from their bargain, the Ninth Circuit reversed the District Court’s denial of restitution and sent him back for further examination. With respect to bad faith, the Ninth Circuit advised that scienter is not required for restitution compensation because such a requirement would defeat Congress’s purpose of compensating consumers who have suffered harm. due to CashCall’s deceptive practices. He also said the district court “misunderstood the nature of CashCall’s deceptive practice” by using consumers’ receipt of their market profit as a reason for denying restitution. With respect to the district court’s decision that the CFPB had failed to establish the appropriate amount of restitution because the proposed amount of restitution had to be deducted to account for expenses, the Ninth Circuit found this approach inconsistent with its precedent which allows restitution to be measured by the total amount lost by consumers (i.e. net income) rather than by the profits of the defendant. The Ninth Circuit described “net revenue” as generally the amount consumers paid for the product or service less any refunds or chargebacks. He distinguished a net income award from a net profit award which allows a defendant to deduct expenses and concluded the decision by stating that “net income may overestimate CashCall’s unfair gains, but if that is the case, it was up to CashCall to prove.” (The Ninth Circuit, however, emphasized that it was not arguing that restitution was necessarily appropriate.)

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