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.
Last Fall, in its 2015 Rulemaking Agenda, the Consumer Financial Protection Bureau (“CFPB”) signaled its intent to “to develop rules to define larger participants in markets for consumer installment loans.” Under the Dodd-Frank Act, the CFPB is authorized to issue “larger participant” rules to define entities in a particular market for consumer financial products or services. The issuance of such rules opens the door for supervisory and examination authority over such entities. Fast forward to Spring 2016, when the CFPB announced that it is accepting complaints from consumers regarding alleged problems with online marketplace loans, and it appears that the CFPB has marketplace lenders squarely in its sights.
The tragic terrorist shootings in San Bernardino on December 2, 2015 shed light on serious risks associated with online marketplace lending. The attackers obtained $28,500 from an online marketplace lender under a pretext, but then allegedly used the funds to reimburse their arms dealer. This apparent link between the money lent and the mass murders led public officials to re-examine the risks associated with this new and increasingly popular method of lending.
Online marketplace lending represents a chance for investors to realize greater returns and for borrowers to refinance expensive debt and pay less interest, as technology and peer-to-peer matching/evaluation greatly reduces the overhead of the business model. Given both the widespread interest in and the potential for the misuse of such online lending platforms, federal and state lawmakers and regulators are increasing scrutiny of the industry.