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UPDATE 1-U.S. consumer bureau sues loan servicer CashCall

Emily Stephenson
Monday, 16 Dec 2013 | 2:52 PM ET

WASHINGTON, Dec 16 (Reuters) - The U.S. consumer watchdog and several state attorneys general on Monday sued a California-based servicer of online loans, accusing the company of wrongly collecting on loans that were made in violation of state laws.

CashCall Inc. serviced online loans that broke consumer protection laws in at least eight states and collected money that borrowers should not have had to repay, the U.S. Consumer Financial Protection Bureau said.

It continued seeking money from borrowers even after the online lender, Western Sky Financial, came under investigation by several states and stopped making loans, CFPB Director Richard Cordray said.

The bureau and states say the loans, which typically had upfront fees and sometimes carried interest rates of more than 300 percent, broke state laws that require lenders to hold licenses or violated caps on interest rates. That meant the loans were legally void, the CFPB said.

"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," Cordray said.

"The Internet is a convenient and desirable place for many consumers and companies to do business, but we cannot allow it to become the Wild West of unregulated and irresponsible lending."

The U.S. consumer bureau, which was created by the 2010 Dodd-Frank law, oversees loan servicers, debt collectors and online lenders.

Attorneys general from states including Colorado, North Carolina and New Hampshire also said on Monday they had filed lawsuits against CashCall or were investigating violations.

CashCall's attorneys said in a statement that the consumer bureau's complaint amounted to an unfair attempt to set interest rate caps for lenders.

"Today's action also raises serious questions of what the CFPB is seeking to accomplish by expending resources to file an action that needlessly duplicates and interferes with ongoing state enforcement efforts," said Neil Barofsky and Katya Jestin, attorneys with the law firm Jenner & Block.

The CFPB's lawsuit, filed on Monday, did not include action against Western Sky Financial.

The complaint against CashCall and its owner was filed in the U.S. District Court for the District of Massachusetts. The officials want CashCall to refund money that consumers should not have paid. They are also seeking financial penalties.

HIGH-INTEREST LOANS

Consumer advocates have raised concerns about online lending, which they say sometimes gets around state laws that protect borrowers.

They are particularly worried that so-called payday loans, or cash advances that carry high interest rates and are meant to be repaid quickly, will migrate online as states try to crack down on the practice.

In Monday's action, the consumer bureau said CashCall serviced and collected on loans made by Western Sky, an online lender based in South Dakota.

New York's attorney general sued Western Sky in August for "scamming" consumers with high interest rates. In September, Western Sky stopped making loans, blaming "unwarranted overreach" by state officials in a note on its website.

Western Sky has said the state laws do not apply to its loans because it is based on an Indian reservation.