Hold online lenders to account

The Consumer Finance Protection Bureau recently brought its first lawsuit against an online lender, accusing CashCall of collecting payments that borrowers didn’t owe. The suit sets up a fight over the new bureau’s jurisdiction, but it’s one the bureau ought to win. Meanwhile, the case highlights how important it is for states to enact and enforce laws that require online lenders to play by the same rules as local banks and storefronts.

FOR THE RECORD:
In a Dec. 31 editorial, the Consumer Financial Protection Bureau was incorrectly referred to as the Consumer Finance Protection Bureau.

According to the bureau’s complaint, CashCall and its owner, J. Paul Reddam, worked through affiliated or subsidiary companies to market and fund loans made online by Western Sky Financial, and then to buy and service those loans. Western Sky is owned by a member of a Sioux Indian reservation in South Dakota, and so claims to be governed only by tribal law. But CashCall, Reddam and company, which tapped into borrowers’ bank accounts outside the reservation, shouldn’t be able to skirt federal and state laws just by bringing a tribe member into a portion of the transaction. Otherwise, one can only imagine the fraud and abuse that could be perpetrated for the price of a tribal shingle.

The jurisdictional fight doesn’t stop there, however. CashCall’s attorney argues that the bureau is trying to limit the amount of interest it charges, and federal law prohibits the agency from doing that. But the interest-rate caps at issue were set by the states, not the bureau. According to the complaint, CashCall charged borrowers in three states interest at up to 20 times the rate allowed by the states’ laws, rendering those loans void. Demanding payments on a voided loan violates the federal law against unfair, deceptive and abusive lending practices, the bureau alleges. It also contends that the defendants failed to obtain the necessary license in six states where loans were made.

That strikes the right balance between the states’ authority to set consumer-protection rules and the bureau’s role in enforcing them. Some states have the resources to bring their own lawsuits — for example, see the California Department of Business Oversight’s work to bar unlicensed payday lenders and stop state banks from working with them. But many other states don’t, leaving their residents vulnerable to the debt traps set by predatory lenders.

Granted, the more stringent the lending rules are, the harder it will be for those with poor credit to obtain money when they really need it. But that’s a judgment for lawmakers and regulators in each state to make. And once those rules are set, financial companies shouldn’t be able to evade them by flying a tribal flag of convenience, or by arguing that the federal agency created specifically to enforce consumer protection laws in the financial industry has to stay on the sidelines.