Alleged “Rent-a-Bank” Scheme may Result in CFPB Enforcement of State Usury Laws & Additional Compliance Concerns

Following the Great Recession, regulators began to turn their attention to risky loans and confusing financial products that contributed to causing the crash. These efforts to better protect consumers from predatory financial products and loans were most notably spearheaded by the creation of the Consumer Financial Protection Board (CFPB). The CFPB is intended to work as a watchdog that investigates and prosecutes non-compliant behaviors. The CFPB also plays a role in educating consumers about loans and financial products and the rule-making process.

As the regulation of financial products marketed and sold to consumers has increased, regulators have become aware of a number of companies and product that seem to be seeking methods to skirt the new rules. Attorneys from the CFPB have characterized the behavior of companies such as Western Sky and CashCall as a attempting to collect on payday loans in states where loans of this type are banned explicitly or effectively by interest rate caps. Concerned about your business and various financial issues? Contact a Baltimore financial advisory lawyer.

The Alleged Payday Loan Scheme

Some readers may recall a series of commercials that inundated the airwaves back in 2009. The ads by a company known as WesternSky frequently aired during late-night hours and promised viewers high-interest rate payday loans. The advertisements prominently featured actors who purported to be members of the Cheyenne River Sioux Tribe.  The loans were offered in all or nearly all states regardless of state-based usury laws. The parties involved in this alleged scheme apparently believed that they had developed an entity structure that would shield the company from state laws.

Under the arrangement, California-based payday lender CashCall worked with the Cheyenne River Sioux Tribe marketing a “100% Native American-owned business” known as Western Sky. When “Western Sky” made a sale, the loan was routinely and almost immediately sold to CashCall. As part of the transfer of the loan, CashCall would apparently reimbursed Western Sky for the costs of its web servers, marketing expenses, bank fees, office costs, and worker costs. The agreement between the companies contained an indemnification clause protecting Western Sky. The agreement also stated that CashCall would provide all customer support associated with the loans. Essentially, WesternSky acted as a conduit through which these loans flowed to CashCall. Because WesternSky was based on Native American land, the company believed that state usury laws did not apply.

Federal Court Finds Cash Call Was “True Lender” and Opens Door for CFPB Enforcement of State Laws

Courts have found that the arrangement between CashCall and WesternSky did not provide CashCall with the protections that it thought it had. For an array of reasons, a federal court determined that CashCall was the “true lender” in the matter. Factors that contributed to finding that CashCall was the true lender includes the fact that CashCall bore the risk of the loans. Additional contributing factors include:

• CashCall processed and controlled all transactional activity.
• Western Sky was incorporated as a South Dakotan, LLC and not as a foreign corporation on tribal land.
• WesternSky did not, in fact, operate for the benefit of the tribe.
• The contractual agreements were formed in the home state of the consumer and not on tribal lands.

The ruling that CashCall was the “true lender” despite the intermediary organization opens the door to CFPB enforcement of state-based usury laws. Under this approach companies that sell or come to own payday loans can theoretically face liability if they attempt to collect in a state where payday loans or high-interest rate loans are banned.

The ruling in Consumer Financial Protection Bureau v. CashCall, Inc. et al means that the “tribal model” employed by CashCall will not offer protection from liability in the 16 specific states involved in the lawsuit. However, the ruling has the potential to open the door for even more sweeping application of regulations throughout the nation. Lenders, financial professionals, and other financial institutions should carefully assess their business model to determine whether the increasingly broad purview of federal regulators and the CFPB is likely to result in an enforcement action against your company.

Work with an Experienced and Strategic Baltimore, Maryland Business Lawyer

For more than 20 years, Baltimore business attorney William Heyman has provided careful advice and guidance to financial institutions and financial professionals. From the Law Firm of William S. Heyman, Mr. Heyman can litigate a FINRA dispute, provide a legal compliance assessment, and handle an array of legal concerns for your company. To discuss how Baltimore fiduciary litigation attorney, Mr. Heyman, can help your business protect itself from liability or meet the challenge presented by commercial litigation, call (410) 305-9287 or contact Mr. Heyman online.