The U.S. Court of Appeals for the Ninth Circuit, in CFPB v. CashCall, has rejected CashCall’s constitutional challenge, affirmed the district court’s finding that the corporate defendants 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 civil penalty amount using a higher tier, and vacated the district court’s denial of restitution.

The CFPB’s lawsuit against CashCall, several related companies, and Paul Reddam, CashCall’s CEO, was originally filed in 2013 in federal district court in Massachusetts.  The CFPB alleged the defendants engaged in deceptive acts and practices in violation of the CFPA based on their efforts to collect loans that were purportedly void in whole or in part under state law because the lender charged excessive interest and/or failed to obtain a required license.  The companies allegedly funded, purchased, serviced, and collected online high-rate installment loans made by a tribally-affiliated lender the CFPB did not sue.  The case was subsequently transferred to a California federal district court.

In 2016, the California federal district court granted the CFPB’s motion for partial summary judgment and held that because CashCall was the “true lender” on the loans, the corporate defendants had engaged in a deceptive practice within the meaning of the CFPA when servicing and collecting on the loans by creating the false impression that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their loan agreements.  The district court also held that Mr. Reddam was individually liable under the CFPA because he participated directly in and had the ability to control the corporate defendants’ conduct.  In 2018, following a bench trial on the appropriate remedies for the defendants’ CFPA violations, the district court rejected the CFPB’s demand for $235 million in restitution and a penalty of $51 million, and instead awarded a $10.3 million penalty, using the first-tier penalty amount for violations that are neither reckless nor knowing.

The Ninth Circuit first rejected the defendants’ argument that the CFPB lacked authority to bring the enforcement action because of the unconstitutional limit on the President’s authority to remove the CFPB Director.  Relying on Collins v. Yellin in which the U.S. Supreme Court held that an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed, the Ninth Circuit held that the enforcement action was validly filed under Director Corday.  As an alternative basis for challenging the CFPB’s constitutionality, the defendants argued that the CFPB’s funding contravenes the Constitution’s separation of powers by violating the Appropriations Clause.  Pursuant to 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 oral argument,” the Ninth Circuit declined to consider it.

Turning to the merits, the Ninth Circuit determined that “[the tribal entity’s] involvement in the transactions was economically nonexistent and had no other purpose than to create the appearance that the transactions had a relationship to the Tribe.”  According to the Ninth Circuit, “the only reason for the parties’ choice of [tribal] law [in the loan agreements] was to further CashCall’s scheme to avoid state usury and licensing laws.”  The Ninth Circuit found that the district court was correct to both refuse to give effect to the choice of law provision and to apply the law of the borrowers’ home states, thereby causing the loans to be invalid.

The Ninth Circuit rejected CashCall’s attempt to invoke the valid when made doctrine, stating that the loans “were not valid when made because there was never any basis for applying the law of the Tribe 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 conclusion that it was the “true lender” on the loans, the Ninth Circuit stated that “[t]o the extent CashCall invokes cases involving banks, we note that banks present different considerations because federal law preempts certain state restrictions on the interest rates charged by banks.”  Commenting that “[w]e do not consider how the result here might differ if [the tribal entity] had been a bank,” the Ninth Circuit stated that “we need not employ the concept of a ‘true lender,’ let alone set out a general test for identifying a ‘true lender.’”  In its view, for purposes of the choice of law question, it was only necessary to look at the  “economic reality” of the loans which “reveal[ed] that the Tribe had no substantial relationship to the transactions.”

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

The Ninth Circuit’s other significant rulings were:

• Finding the district court’s conclusion that CashCall did not act recklessly to be clearly erroneous, the Ninth Circuit vacated the tier-one penalty imposed by the district court and remanded with instructions to reassess it for the period beginning September 2013 using the higher tier-two penalty that requires a finding of recklessness.  Based on its review of the facts, the Ninth Circuit concluded that from September 2103 on, the danger that CashCall’s conduct violated the CFPA was “‘so obvious that [CashCall] must have been aware of it.’” (citations omitted)
• The district court did not err in holding Mr. Reddam personally liable.  It was undisputed that Mr. Reddam had authority as CEO to control CashCall’s acts.  The Ninth Circuit rejected Mr. Reddam’s attempt to rely on advice of counsel to show he lacked the necessary mental state for personal liability and found that because continuing to collect loans after 2013 was reckless, he had the requisite knowledge for individual liability.
• Finding that the district court had incorrectly relied on its findings that CashCall did not act in bad faith and that consumers had received the benefit of their bargain, the Ninth Circuit vacated the district court’s denial of restitution and remanded for renewed consideration.  With respect to bad faith, the Ninth Circuit indicated that scienter is not required for a restitution award because such a requirement would frustrate Congress’s objective of compensating consumers who suffered harm as a result of CashCall’s deceptive practices.  It also indicated that the district court had “misunderstood the nature of CashCall’s deceptive practice” by using consumers’ receipt of the benefit of their bargain as a reason to deny restitution.  With respect to the district court’s determination that the CFPB had not established the appropriate amount of restitution because the proposed restitution amount had to be netted to account for expenses, the Ninth Circuit found this approach to be inconsistent with its precedent which allows restitution to be measured by the full amount lost by consumers (i.e. net revenues) rather than a defendant’s profits.  The Ninth Circuit described “net revenues” to typically be the amount consumers paid for the product or service minus refunds or chargebacks,  It distinguished an award of net revenues from an award of net profits which allows a defendant to deduct expenses and concluded the decision by stating that “net revenues could overstate CashCall’s unjust gains, but if so, that was CashCall’s burden to prove.”  (The Ninth Circuit emphasized however, that it was not holding that restitution was necessarily appropriate.)

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