The US District Court for the Central District of California (the Central District) has recently rendered two decisions with "true lender" implications of potential significance to the marketplace lending industry, but with markedly contrasting results. First, on August 31, 2016, US District Judge John F. Walter of the Central District granted a motion by the Consumer Financial Protection Bureau (CFPB) for partial summary judgment in Consumer Financial Protection Bureau v. CashCall, Inc., et al.,1 relying upon, inter alia, a recent West Virginia decision, CashCall, Inc. v. Morrissey,2 and its "predominant economic interest" test to conclude that CashCall, Inc. (CashCall) and not the federally-recognized tribe that originated the loans at issue in the case, was the "true lender" for purposes of applying federal choice of law rules. Then, on September 20, 2016, in Beechum v. Navient Solutions, Inc.3 US District Judge Jesus G. Bernal, also of the Central District, dismissed a putative class action alleging California state usury violations in relation to certain student loans originated by a national bank. The court declined to recharacterize the Student Loan Marketing Association (Sallie Mae) or its successors4 as the "true lender" for purposes of the exclusion afforded to banks under the California usury laws. The plaintiffs in the Navient Solutions case filed a notice of appeal to the Ninth Circuit on October 20, 2016. The CashCall and Navient Solutions cases are discussed in further detail below.

CashCall

The Central District's decision in Consumer Financial Protection Bureau v. CashCall, Inc., et al. is potentially of significant importance to participants in the marketplace lending sector for two reasons: first, following the "predominant economic interest" test applied in a recent West Virginia case,5 the Central District looks to the economic substance of a third-party lending arrangement, rather than its form, in identifying the "true lender" for purposes of state usury limits and licensing requirements. Second, in upholding the CFPB's position that the act of servicing and collecting loans which violate a fundamental state policy can, in and of itself, constitute a deceptive practice under the Consumer Financial Protection Act of 2010 (CFPA),6 the Central District, in effect, appears to acknowledge the power of the CFPB to enforce usury limits and other substantive state consumer lending laws at a federal level. The level of the penalties and other remedies the CFPB may impose for such violations, in comparison with those typically imposed by the various states, remains unclear, however.

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Footnotes

1 Consumer Financial Protection Bureau v. CashCall, Inc., C.D. Cal., No. 2:15-cv-07522 (Aug. 31, 2016).

2 CashCall, Inc. v. Morrissey, 2013 W. Va. LEXIS 587 (W. Va. May 30, 2014).

3 Beechum v. Navient Solutions, Inc., C.D. Cal., No. 2:15-cv-08239-JGB-KK (Sep. 20, 2016).

4 Sallie Mae was a government-sponsored enterprise that purchased federally-guaranteed student loans from banks. Navient Solutions, Inc., a successor to Sallie Mae formed in connection with its split-up in 2014, is a student loan servicer.

5 CashCall, Inc. v. Morrissey, 2013 W. Va. LEXIS 587 (W. Va. May 30, 2014). The court also cites Ubaldi v. SLM Corp., 852 F. Supp. 2d 1190 (N.D. Cal. 2012), People ex rel. Spitzer v. Cty. Bank of Rehoboth Beach, Del., 45 A.D.3d 1136, 846 N.Y.S.2d 436 (N.Y. App. Div. 2007) and Easter v. American West Financial, 381 F.3d 948 (9th Cir. 2004). Other courts have rejected this approach. See, e.g., Discover Bank v. Vaden, 489 F.3d 594 (4th Cir. 2007); Hudson v. Ace Cash Express, Inc., 2002 U.S. Dist. LEXIS 19210 (S.D. Ind. 2002).

6 Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173), (the Dodd-Frank Act), codified at 12 U.S.C. 5511 et seq.

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