Bank and non-bank lending combinations/CFPB vs CashCall
The US District Court for the Central District of Ca. granted the Consumer Financial Protection Bureau’s (“CFPB”) Motion for Partial Summary Judgement on August 31, 2016. This is a trial court decision and could be reversed on appeal. The “combination” at issue related to CashCall’s arrangement with Western Sky Financial (“Western”). Western claimed an “affiliation” with the Cheyanne River Sioux Tribe. Western claimed immunity from state usury laws which laws would have applied to consumer loans of $10,000 or less “(the “Loan Product”). Other attributes of the business model related to the Loan Product were: CashCall”s establishment of a reserve account for Western where enough money was deposited to fund two (2) days of loans and CashCall (through a wholly-owned subsidiary) purchased the loans after a three(3) day waiting period. Another wholly-owned CashCall subsidiary serviced the Loan Product. CashCall provided marketing, technical support, customer service for Western and indemnified Western for costs arising from legal claims. The interest rates for the Loan Product were outrageous. The court agreed with the CFPB and found that CashCall was the “true lender”. There is a discussion of an “economic reality test” which is beyond the scope of this article.
The issues to address as I continue to negotiate these strategic combinations are; a review of the terms and conditions of the reserve account, the timeframes for the spinoff of the Loan Product and whether the bank partner retains some risk of exposure. The marketing, technology and customer service is also an issue. One of the reasons the non-bank partner handles these obligations is because it has the marketplace expertise. I also think you have to look carefully at the Loan Product in this case. With interest rates clearly violating the usury laws, there is always going to be a “red flag”.
Interestingly enough, on July 29, 2016, the FDIC issued FIL-50-2016, seeking comment on proposed Guidance for Third-Party Lending. The comment period was extended to Oct. 27, 2016. The proposed guidance defines third-party lending as an arrangement that relies on a third party to perform a significant aspect of the lending process. Categories include (but are not limited to): institutions originating loans for third parties, institutions originating loans through third parties or jointly with third parties and institutions originating loans using platforms developed by third parties. The focus is that the institutions establish a third-party risk management program and compliance management system.
It appears, that the FDIC recognizes these bank-partner lending arrangements. At this point, we will continue to proceed with caution on structuring these strategic combinations.