West Virginia Supreme Court Upholds $14 Million Award In Finance Company "True Lender" Case

Debt Collection Consumer Lending Enforcement

On May 30, the West Virginia Supreme Court of Appeals affirmed a series of trial court orders requiring a nonbank consumer finance company to pay $14 million in penalties and restitution for allegedly violating the state’s usury and debt collection laws. CashCall, Inc. v. Morrisey, No. 12-1274, 2014 WL 2404300 (W. Va. May 30, 2014). On appeal, the finance company contended, among other things, that the trial court erred in applying the “predominant economic interest” test to determine whether the finance company or the bank that funded the loans was the “true lender.” The trial court held that the finance company was the de facto lender and was therefore liable for violating the state’s usury and other laws because: (i) the agreement placed the entire monetary burden and risk of the loan program the finance company; (ii) the company paid the bank more for each loan than the amount actually financed by the bank; (iii) the finance company’s owner personally guaranteed the company’s obligations to the bank; (iv) the company had to indemnify the bank; (v) the finance company was contractually obligated to purchase the loans originated and funded by the bank only if the finance company’s underwriting guidelines were employed; and (vi) for financial reporting, the finance company treated such loans as if they were funded by the company. The court affirmed the trial court holding and rejected the finance company’s argument that the trial court should have applied the “federal law test” established by the Fourth Circuit in Discover Bank v. Vaden, 489 F3d 594 (4th Cir. 2007). In Discover Bank the Fourth Circuit held that the true lender is (i) the entity in charge of setting the terms and conditions of a loan and (ii) the entity who actually extended the credit. In support of the trial court ruling, the court explained that the “federal law test” addresses “only the superficial appearance” of the finance company’s business model. Further, the court stated that the Fourth Circuit test was established in a case where the non-bank entity was a corporate affiliate of the bank, which was not the case here, and added that if the court were to apply the federal law test, it would “always find that a rent-a-bank was the true lender of loans” like those at issue in this case.