The Consumer Financial Protection Bureau (CFPB) today filed its first online lending lawsuit against a loan servicer the agency alleges collected money that consumers did not owe.

 

The CFPB alleges that online loan servicer CashCall Inc., its subsidiary WS Funding LLC and its affiliate Delbert Services Corporation—a Nevada collection agency—engaged in unfair, deceptive and abusive practices, including illegally debiting consumer checking accounts for loans that were void. 

 

“Many consumers signed loan agreements permitting loan payments to be debited directly from their bank accounts, similar to a payday lender,” said CFPB Director Richard Cordray in a statement. “CashCall could then access the borrower’s checking account and take money before the borrower could choose to pay rent or utilities or other expenses.”

 

The agency’s investigation discovered that, beginning in 2009, CashCall and WS Funding entered into an agreement with Western Sky Financial, another online lender. 

 

Owned by a member of the Cheyenne River Sioux Tribe, Western Sky believed it state laws did not apply to its business because it was based on an Indian reservation. This relationship, however, did not exempt the company from having to comply with state laws when it makes loans via the Internet to consumers in various states, stated CFPB’s Cordray.

 

Through this arrangement between CashCall and Western Sky, the CFPB says hundreds of loans were made in Western Sky’s name using money from WS Funding. 

 

The loans ranged from $850 to $10,000 and typically had upfront fees, lengthy repayment terms and annual interest rates ranging from about 90% to 343%, according to the CFPB’s investigation. 

 

“For example, a consumer borrowing $2,600 was required to pay a total of about $13,480 over a four-year repayment period,” stated Cordray. “Or, in another example, a consumer borrowing $10,000 was required to pay about $62,450 over a seven-year repayment period—more than six times the amount borrowed.”

 

States affected by the practices of CashCall and its affiliates included Arizona, Arkansas, Colorado, Indiana, Massachusetts, New Hampshire, New York and North Carolina. 

 

In these states, if a loan exceeds the interest rate cap, or if a lender is not licensed, the loan is completely void or the borrower has no obligation to repay certain finance charges, according to the CFPB. As a result, consumers were under no legal obligation to pay back money that CashCall took from their bank accounts. 

 

“When CashCall debited people’s bank accounts or demanded that people pay them back, they often were taking money that the consumers did not owe on loans that did not even legally exist,” said Cordray.

 

At least 13 states have filed formal action against CashCall, with more states filing complaints or opening investigations on the heels of the CFPB’s lawsuit announcement.  

 

“Today we are taking action against CashCall for collecting money it had no right to take from consumers,” Cordray said. “Online lending is rapidly growing and deserves ample regulatory attention. The Consumer Financial Protection Bureau will take action against online lenders and servicers that engage in unfair, deceptive, or abusive practices.”