CFPB Asserts Deception Regardless of Intent

December 1, 2016 by Amy E. Martinez, Esq.

CFPB regulations are known to cause concern to even the most conservative financial services provider, but to make matters worse, a recent Federal Court decision has raised issues which are crucial to your lending/collecting/servicing business.

Historically, in order for a plaintiff to establish liability for fraud, they had to provide evidence that the misrepresentations or inaccuracies made during solicitation of clients were intentional. But according to the outcome of a recent lawsuit wherein the CFBP alleged that a financial services provider committed “Unfair Deceptive, Abusive Acts or Practices” (“UDAAP”), it appears that defendants can now be held liable even if the misrepresentations were made unintentionally and the defendant acted in good faith.

In a case that has been dragging on since 2014, the CFPB’s motion for partial summary judgment was granted on August 31, 2016, pursuant to a finding that CashCall, Inc. (“CashCall”) engaged in deceptive acts and practices as outlined under UDAAP.

The lawsuit stems from CFPB allegations that CashCall entered into agreements with Western Sky Financial (“Western Sky”), a financial institution that is sponsored and licensed by the Cheyenne River Sioux Tribe (“CRST”) to conduct lending operations on sovereign reservation lands in South Dakota. Western Sky operated a call center on the reservation, employing over 100 individuals.

Western Sky originated consumer loans under laws regulated by the CRST, and not subject to state laws. CashCall then entered into arrangements to directly purchase loans made by Western Sky and fund loans with CashCall assets. Their methods called for loans to be immediately sold to CashCall after origination, with CashCall collecting payments and taking collection actions against delinquent accounts.

The CFPB alleged that CashCall collected payments on the Western Sky loans by creating the impression to consumers that they were servicing CRST regulated contracts. The CFPB also claimed that because the impression set by CashCall was patently false, it was meant to mislead consumers. The federal district court agreed, and found that CashCall had indeed engaged in misleading and deceptive practices with Western Sky customers.

The Court did not allow CashCall to rely on sovereign tribal law and completely ignore applicable state laws. By servicing CRST loans, the CFPB asserts that CashCall gave consumers the impression that CRST law bound them to make payments even though CashCall owned the loans. The CFPB further argued that CachCall is not entitled to tribal protections and therefore cannot use those protections to protect it from the consequences of its deceptive practices under federal law.

Ultimately, the Court determined that CashCall misled consumers by making them believe that they were required under CRST laws to repay the loans; and even if the representations were made under a mistaken belief that the information was true and correct, that was not a viable defense and could not shield CashCall from liability.

The Court did not consider the possibility that CashCall believed it was working under CRST law or that somehow it was exempt from abiding by state law. Unfortunately, CashCall did not provide the Court with evidence of its true intentions, but suffice it to say the Court was unwilling to make an assumption of ignorance. As such, CashCall’s intentions were not a considered or weighed by the Court prior to making its decision.

The case sets a dangerous precedent for other lenders doing business under third-party contracts, and leaves behind several landmines for financial services providers acting in situations where aspects of the law may be unclear to their organization. It also opens the door to potential consumer litigation which can now be based simply upon an allegation of deceptive practices without the requirement that plaintiffs prove there was an ‘intent to deceive.’

This decision establishes a broad legal precedent regarding the evidence necessary (or lack of evidence) to establish the existence of deceptive practices, and could ultimately expose financial institutions to legal challenges from consumers seeking to bypass contractual obligations by arbitrarily and capriciously claiming they were misled.