The U.S. District Court for the Central District of California recently denied the CFPB’s request for $236 million in restitution and $52 million in penalties against a lender, its president and CEO, and two affiliates (Defendants) for Consumer Financial Protection Act (CFPA) violations, awarding a $10 million penalty instead. Following the Court’s finding that Defendants violated the CFPA, the CFPB attempted to prove, at a subsequent bench trial for damages, that restitution and the penalty amount sought were appropriate. The Court, finding that the CFPB failed to establish any credible evidence in support thereof, denied restitution and awarded a significantly lesser penalty amount.
The facts at issue were undisputed. In 2005, the lender began offering high-interest unsecured consumer loans nationwide through a partnership with a South Dakota tribal-lands based entity under the theory that the loans would be made under tribal law and would not be subject to the licensing and usury laws of states where the borrowers resided. Consumers applied for the loans through the entity’s website, and the entity originated and sold the loans (with interest rates between 89% and 169%) to the lender’s affiliate. Each borrower executed an agreement containing numerous disclosures and key loan terms, and received a notice when their loan was sold stating that the affiliate owned the loan and that payments should be made to the lender.
The lender terminated the program in 2013, and the CFPB initiated this lawsuit against Defendants shortly thereafter alleging unfair, deceptive, and abusive acts and practices in violation of the CFPA. The Court subsequently granted the CFPB’s motion for partial summary judgment, holding that Defendants violated the CFPA based on its finding that the lender, rather than the tribal entity, was the true lender and that Defendants therefore engaged in deceptive practices when servicing and collecting on the loans by creating a false impression that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their agreements.
At trial, the CFPB attempted to prove that restitution was appropriate because Defendants engaged in a deliberate scheme to evade consumer protection laws and concealed their involvement so that borrowers would not realize the loans were illegal and potentially uncollectable. The Court, however, held that the question of restitution turned on whether Defendants used fraudulent misrepresentations to dupe consumers into believing they were getting something other than what they actually received.
The Court found that the CFPB failed to provide any credible evidence that Defendants engaged in such a scheme and found, instead, that the evidence established “quite clearly” that Defendants disclosed the material terms of the loans – including fees and interest rates – before funding, and that borrowers received the benefit of their bargain. The Court also found that even if the CFPB had established that restitution was appropriate, it failed to satisfy its burden of proving that the restitution amount sought reasonably approximated the Defendants’ unjust gains. The Court therefore denied restitution and awarded a significantly lesser penalty than that requested by the CFPB.
The case is Consumer Financial Protection Bureau v. CashCall, Inc., et al, case number 2:15-cv-07522, in the U.S. District Court for the Central District of California.