CashCall Revisited (Again): The CFPB’s Continued Federalization of State Law

Last August, we wrote about the Consumer Financial Protection Bureau’s (CFPB) complaint against NDG Financial Corp. and how it represented a continuing evolution of the CFPB’s theory that certain state law violations might be predicates for federal law claims of unfair, deceptive, and abusive conduct (UDAAP). We refer to this as the “CashCall theory,” because the CFPB first articulated this novel approach to UDAAP enforcement in its complaint against CashCall, Inc. In December, the CFPB took two more steps down this road.

First, the CFPB filed an amended complaint against NDG. In addition to adding defendants and background allegations regarding the defendants’ conduct, the amended complaint further refined the CFPB’s theory that attempting to collect on loans made in alleged violation of certain state laws constitutes a violation of federal UDAAP prohibitions. As we discussed in August, the NDG complaint substantially expanded the list of states in which the CFPB alleged that collection activity might constitute federal UDAAP violations because the underlying state law rendered the original loan void, and thus the collection activity also illegal. But the CFPB seems to have had second thoughts about the applicability of those state laws. After adding Alabama to the list of states where it alleged that “state laws render payday loans void if they are made without a license” in the original NDG complaint, the CFPB has now deleted it from the list. Compare NDG Compl., ¶ 112 and NDG Amend. Compl. ¶ 263. The NDG amended complaint thus represents the CFPB’s third iteration of the list of states where allegedly usurious or unlicensed loans are void. While the CFPB is to be commended for updating its pleadings based on what is presumably new legal research, the agency’s lack of clarity as to the operation of state law, and the continuous evolution of the “CashCall states,” raises questions about the standard to which it seeking to hold lenders. If the CFPB itself can’t decide which state laws might raise federal UDAAP concerns, should it really be seeking to hold lenders liable under federal law for attempting to collect on loans made in these states?

The NDG amended complaint also clarifies the CFPB’s theory of abusiveness as it applies to these claims. As we previously described, in CashCall, the CFPB alleged that attempting to collect on loans that are allegedly rendered void by state usury or licensing laws (whichever states that may be on a given day) constituted a violation of federal UDAAP prohibitions. With respect to abusiveness, the CashCall complaint alleged that such collection activity takes “unreasonable advantage of . . . a lack of understanding on the part of the consumer of the material risks, costs, or conditions of” a loan, in violation of prong 2(B) of the abusiveness standard in the Dodd-Frank Act. See 12 U.S.C. § 5531(d)(2)(B). In the original NDG complaint, however, the CFPB muddied the abusiveness waters, as it was not clear if the agency was asserting the same theory of abusiveness, was instead relying on the theory that collecting in such circumstances instead “materially interferes with the ability of a consumer to understand a term or condition” of a loan (in violation of prong (1) of the definition, see 12 U.S.C. § 5531(d)(1)), or was relying on both. The amended complaint in NDG adds an express citation to prong (2) of the definition (in addition to the citation to prong (1) that was included in the original complaint). It thus appears that the CFPB is casting a broad net and relying on both prongs of the abusiveness definition. As with its evolving list of states to which this theory applies, the agency’s evolving legal theory suggests that federalizing these state laws is not a straightforward legal exercise, and one perhaps better achieved through providing industry guidance in the first instance, rather than pursuing enforcement activity.

In addition to filing an amended complaint against NDG in December, the CFPB also issued a consent order against EZCORP, Inc. Among the conduct at issue in the consent order, the CFPB found that EZCORP’s representations to consumers in Colorado that they could not prepay their loans without penalty were deceptive. It is not clear if the basis for the CFPB’s deception finding — which was limited to Colorado consumers — was based on representations made by EZCORP only in Colorado (in contradiction to the company’s policies that allegedly allowed prepayment without penalty), was based on a provision of the contracts used in Colorado (perhaps as a result of state law), or was based on Colorado state law itself, which provides that “the consumer may prepay in full . . . the unpaid balance of a consumer credit transaction at any time without penalty.” Colorado Uniform Consumer Credit Code, § 5-2-210. If the basis for the CFPB’s deception finding is in fact the latter — i.e., that Colorado law permits prepayment of consumer loans without penalty so that any representation to the contrary is deceptive — it is yet another example of the CFPB’s reliance on underlying state law to take action against collection activities.

While the EZCORP matter has settled, both CashCall and NDG are in active litigation. One hopes that the courts will provide greater clarity as to the applicability and scope of the CFPB’s theories than the agency has done to date.