Who Bears the Risk? Federal Court Holds That a Purchaser of Unsecured Consumer Loans Is the “True Lender,” Voiding Enforceability of the Loans
By Irene C. Freidel and David D. Christensen
A California federal court has held that the purchaser of small-dollar consumer loans is the “true lender” and thus subject to state usury laws, even though a separate tribal entity funded and closed the loans in its own name. See Consumer Financial Protection Bureau v. CashCall, Inc*. The court’s holding, which adopts the arguments of the Consumer Financial Protection Bureau (“CFPB”) and renders the loans serviced by CashCall unenforceable, challenges the business model that many marketplace lending platforms use to offer alternative, unsecured loans to consumers. Generally speaking, partnerships between marketplace platforms and tribal entities, state-chartered (and federally insured) banks, or national banks are intended to protect the platforms from the substantial licensing and compliance burden of state lending and licensing laws, and also to permit loans that might otherwise exceed the borrower’s home state usury limit. The recent CashCall decision, however, is another reminder that state and federal regulators, as well as plaintiffs’ attorneys, may be able to pierce these partnerships where a court finds that the financial institution funding and closing the loan does not bear substantial risk on those loans.