O’Donovan et al. V. Cashcall, Inc.
June 10, 2014
On July 30th, following months of consideration, the Honorable Maria-Elena James, the federal magistrate judge presiding over the action, ruled that consumers are entitled to a trial on whether CashCall’s loans of $2,600 and above over a period of 42 months at interest rates of 96% or higher are unconscionable under California law. de la Torre v. CashCall, Inc., 2014 U.S. Dist. LEXIS 105313 (2014). Two years ago, Judge James certified a California class of some 135,000 borrowers.
Unconscionabilty requires a determination that there is a substantial inequality of bargaining power resulting in no negotiation and whether the substantive terms of the agreement are “substantially unfair” to “unreasonably one-sided.”
At issue in the case are CashCall’s consumer loans of $2,600 carrying interest rates of 96% or higher. For CashCall’s $2,600 loan at 96%, the actual interest rate exceeded 99% with total loan payments of $9,150 or 3.6 times the amount borrowed. For the 135% loan, the interest rate exceeded 138%, with total loan payments of $11,000.00 or 4.3 times the amount borrowed.
CashCall markets its loans to sub-prime borrowers with FICO scores less than 600. For the past ten years, the default rate for the $2,600 loan has been 35-45%, and CashCall both anticipates and builds that high default rate into its business model. During the class period, CashCall made 135,288 loans with interest rates above 90%. Of those loans, nearly 61,000, or 45.1%, defaulted. Of that number, nearly 10% of the loans defaulted without any repayment of principal. Nearly 59,000 loans, or 43.7%, were re-paid in full prior to the end of the 42-month loan term. Nearly 10% of those loans were paid off within one month of origination. More than 50% of the remaining loans were paid off within six months of origination. During the 42-month loan term period, CashCall recovered the principal loan amount of $2,600 in 12 months. The average life of the $2,600 loans was 20 months. CashCall still earned a profit if the borrower defaulted well before the maturity date.
CashCall sought summary judgment arguing that its loan products were not unconscionable as a matter of law. The Court denied CashCall’s motion. The Court ruled that the material facts are in dispute and require a trial.
The parties also filed cross-motions for summary judgment on behalf of a “Conditioning Class” of nearly 100,000 borrowers who were charged insufficient funds fees (NSF) by CashCall when the deposit accounts established in connection with these loans contained insufficient funds at the time CashCall deducted scheduled loan payments. The Court held that federal law prohibits lenders from conditioning loans on a borrower’s agreement to have loan payments automatically withdrawn from the bank accounts electronically, even if the lender permits borrowers to cancel their authorization of electronic funds transfer prior to the first payment. The Court reasoned that the federal statutory language is clear-that a lender may not condition loans on customer’s agreement to repay by means of a pre-authorized electric funds transfer to a deposit account. The Court, therefore, granted the borrowers’ motion on liability and denied CashCall’s motion. The amount of damages resulting from CashCall’s collection of NSF fees from this class of borrowers remains will be determined at trial.
James Sturdevant, one of the lead lawyers for the state-wide class, applauded the decision. “CashCall’s $2600 signature loan is insidious and its lending practices should rightly come before the cross-hairs of public judicial review and decision.” His co-counsel, Arthur Levy, added that “It is clear from the record before Judge James that CashCall’s lending practices are unconscionable. We are hopeful the Court will determine after a trial that CashCall’s loans violate California law, and return hundreds of millions of dollars to the class of borrowers.”
In addition to The Sturdevant Law Firm and Arthur Levy, plaintiffs are represented by the firms of Terrell, Marshall, Daudt & Willie PLLC; Rukin, Hyland, Doria & Tindall LLP; and the Law Offices of Damon M. Connolly.
Plaintiffs are asking Judge James to hold the trial later this year.