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In a ruling with important implications for the Consumer Financial Protection Bureau (Bureau or CFPB), the Ninth Circuit has revived the CFPB’s claims for substantial civil penalties and restitution in a lawsuit that was first filed some seven years ago. In a May 23, 2022 opinion, the court reversed and remanded a district court decision that had limited the civil penalties awarded to the Bureau and that had declined to award any restitution.

The case involved an enforcement action brought by the CFPB against CashCall and its founder, sole owner and CEO. As we’ve previously discussed, here and here, the CFPB alleged that servicing and collecting on loans that are void or uncollectable under state law because of state licensing or usury statutes constitutes a federal deception violation. The district court granted summary judgment to the CFPB on the merits of its claims, finding that collecting on such loans constituted deceptive conduct because it created the “‘net impression’ that the loans were enforceable.” In reaching this conclusion, the district court had also held that although the loans were made by a separate entity (Western Sky Financial), CashCall, which purchased the loans days after they were made, was the “true lender” on the loans because “the entire monetary burden and risk of the loan program was placed on CashCall, such that CashCall, and not Western Sky, had the predominant economic interest.”

Having determined liability on summary judgment, the district court held a bench trial to determine the remedy. That’s where the CFPB’s success had largely ended. The district court, relying on the fact that the defendants had sought legal advice and that at the time there was no case law clearly establishing their lending model improper, denied the CFPB’s request to impose civil penalties based on recklessness, and instead imposed civil penalties based on the lowest tier of civil penalties. The district court also denied the CFPB’s request for restitution because the agency “did not show that Defendants intended to defraud consumers or that consumers did not receive the benefit of their bargain.” Both CashCall and the CFPB appealed.

On appeal, the CFPB fared much better. The Ninth Circuit affirmed the district court’s holding that “all of the loan transactions at issue here were conducted by CashCall, not Western Sky” given that CashCall provided the money with which Western Sky made loans, purchased the loans shortly after they were made and bore all economic risks and benefits of the transaction. As a result, state laws applied, as opposed to tribal law, which CashCall had argued should apply to loans made by Western Sky. In reaching this conclusion, however, the Ninth Circuit expressly disclaimed any statement as to who the “true lender” of the loans was or any implications for more traditional bank partnerships: “To the extent that 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…. We do not consider how the result here might differ if Western Sky had been a bank. And we need not employ the concept of a ‘true lender,’ let alone set out a general test for identifying a ‘true lender.’”

The Ninth Circuit went on to affirm the district court’s finding that because state law applies—and rendered the loans void or uncollectible—attempting to collect on the loans was a deceptive practice because it “[led a consumer to believe an invalid debt is actually a legally enforceable obligation.”

The Ninth Circuit then went on to address remedies, and here it reversed the district court’s rulings. First, the court held that once CashCall ceased operating its lending program in light of its counsel’s advice to do so because of a changing regulatory and litigation environment, its continued collection on outstanding loans met the recklessness factor for heightened civil money penalties. In the Ninth Circuit’s words, at that point “the danger that CashCall’s conduct violated the statute was ‘so obvious that [CashCall] must have been aware of it.’” The Ninth Circuit thus vacated the $10 million penalty the district court had imposed and remanded the case with instructions that the district court recalculate the penalty for the latter time period using the higher penalty amount applicable to reckless conduct.

Second, the Ninth Circuit reversed as clear error the district court’s holding that restitution was inappropriate because CashCall had not intended to defraud borrowers and consumers had “received the benefit of their bargain.” In so doing, the Ninth Circuit noted that knowledge or intent is not required for an award of restitution and that “whether consumers received the benefit of their bargain is not relevant” if the conduct was illegal. The court therefore remanded the matter to the district court to determine whether, and if so how much, restitution was appropriate applying the correct legal principles.

The Ninth Circuit decision represents a substantial vindication for the CFPB, both with respect to the legal theory underpinning their case (which they have used in other cases as well) and, more importantly, in terms of the remedies available to the agency. The district court’s original decision had been one a series of remedial rebukes the courts had handed the Bureau; the Ninth Circuit’s decision is likely to further embolden the agency in seeking substantial monetary relief in its enforcement actions.