On May 23, the United States Court of Appeals for the Ninth Circuit confirmed a district court judgment finding an online lending agent and its affiliates liable for a deceptive lending scheme. However, the appeals court overturned the district court’s order imposing a civil penalty of $10 million (instead of the requested fine of over $50 million) and denied a CFPB request for $235 million. millions of dollars in restitution. As previously covered by InfoBytesin 2018, the district court ordered defendants to pay the civil penalty for offering high-interest loans in states where usury laws prohibited transactions after determining in September 2016 that the service of online lending was the “true lender” of loans that were issued by entities located on tribal lands (covered by a Buckley Special Alert). At the time, the district court found that a lower legal penalty was more appropriate than the amount sought by the CFPB because the Bureau had failed to demonstrate that the company had “knowingly violated the CFPA” or acted” recklessly”. In denying the amount of restitution sought by the Bureau, the district court found that the agency presented no evidence that defendants “intended to defraud consumers or that consumers failed to benefit from their market from the [program]for restitution to be an appropriate remedy.
According to the 9th Circuit, the district court applied the wrong legal analysis in 2018 when it imposed only a $10 million civil penalty on defendants and no restitution payments to consumers harmed by predatory lending. Applying federal common law principles of choice of law, the appeals court declined to apply tribal law, finding that state laws applied to the loans, thus rendering them invalid. The appeals court determined that the defendants acted recklessly when they tried to collect invalid debts after the lawyer advised in 2013 that such actions were likely illegal. While the defendants terminated the Tribal Loan Program for new loans, the 9th Circuit said they continued to collect on existing loans. “We conclude that from September 2013, the danger that [defendants’] behavior violated the law was “so obvious that [defendants] should have been aware of this,” the appeals court wrote. Noting that penalties for “reckless” violations under the second tier were appropriate as of September 2013, the appeals court ordered the district court to recalculate the civil penalty on remand. The 9th Circuit also ordered the remand district court to reconsider appropriate restitution without relying on irrelevant considerations that prompted its earlier decision, including (i) whether the defendants acted in bad faith; and (ii) “whether consumers have benefited from their market”. Further, the appeals court held that the district court erred in stating “that the ‘proposed restitution amount [should be] net to account for expenses. “
The 9th Circuit also found that the district court was correct in holding one of the defendants personally liable for the conduct of the business. Further, the appeals court held that the defendants’ argument that the Bureau’s structure is unconstitutional did not affect the validity of the lawsuit (which was filed when the Bureau was headed by the former legally appointed director Richard Cordray), writing that, as in Collins vs Yellen (covered by InfoBytes here), “the illegality of the dismissal provision does not deprive the Director of the power to discharge the other responsibilities of his office”.