United States District Court, N.D. California
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For Eduardo De La Torre, Plaintiff: Damon M. Connolly, LEAD ATTORNEY, Law Offices of Damon M. Connolly, San Rafael, CA; James C. Sturdevant, LEAD ATTORNEY, The Sturdevant Law Firm, San Francisco, CA; Whitney Stark, LEAD ATTORNEY, Terrell Marshall Daudt & Willie, PLLC, Seattle, WA; Arthur David Levy, San Francisco, CA; Melinda Fay Pilling, Rukin Hyland Doria and Tindall, San Francisco, CA; Steven M. Tindall, Rukin Hyland Doria & Tindall LLP, San Francisco, CA.
For Lori saysourivong, Plaintiff: James C. Sturdevant, The Sturdevant Law Firm, San Francisco, CA; Whitney Stark, Terrell Marshall Daudt & Willie, PLLC, Seattle, WA.
For Cashcall, Inc., Defendant: Brad W. Seiling, LEAD ATTORNEY, Manatt Phelps & Phillips LLP, Los Angeles, CA; Claudia Callaway, LEAD ATTORNEY, PRO HAC VICE, Manatt Phelps & Phillips, LLP, Washington, DC; Lydia Michelle Mendoza, LEAD ATTORNEY, Manatt Phelps and Phillips LLP, Los Angeles, CA; Noel Scott Cohen, LEAD ATTORNEY, Manatt Phelps & Phillips, Los Angeles, CA.
For Cashcall, Inc., Counter-claimants: Brad W. Seiling, LEAD ATTORNEY, Manatt Phelps & Phillips LLP, Los Angeles, CA; Claudia Callaway, LEAD ATTORNEY, PRO HAC VICE, Manatt Phelps & Phillips, LLP, Washington, DC; Lydia Michelle Mendoza, LEAD ATTORNEY, Manatt Phelps and Phillips LLP, Los Angeles, CA; Noel Scott Cohen, LEAD ATTORNEY, Manatt Phelps & Phillips, Los Angeles, CA.
For Eduardo De La Torre, Counter-defendant: Damon M. Connolly, LEAD ATTORNEY, Law Offices of Damon M. Connolly, San Rafael, CA; James C. Sturdevant, LEAD ATTORNEY, The Sturdevant Law Firm, San Francisco, CA; Whitney Stark, LEAD ATTORNEY, Terrell Marshall Daudt & Willie, PLLC, Seattle, WA; Arthur David Levy, San Francisco, CA.
For Lori saysourivong, Lori Saysourivong, Counter-defendant: Arthur David Levy, LEAD ATTORNEY, San Francisco, CA; James C. Sturdevant, LEAD ATTORNEY, The Sturdevant Law Firm, San Francisco, CA; Whitney Stark, LEAD ATTORNEY, Terrell Marshall Daudt & Willie, PLLC, Seattle, WA.
ORDER RE: MOTIONS FOR SUMMARY JUDGMENT Re: Dkt. Nos. 159, 166, 175
MARIA-ELENA JAMES, United States Magistrate Judge.
Pending before the Court are the Motions for Summary Judgment filed by Defendant CashCall, Inc. regarding Plaintiffs Eduardo de la Torre and Lori Kempley's (" Plaintiffs" ) Conditioning Claim (" Def. Condit. Mot.," Dkt. No. 159) and Unconscionability Claim (" Unc. Mot.," Dkt. No 166). Also pending is Plaintiffs' Cross-Motion for Partial Summary Judgment on the Conditioning Claim and California Business and Professions Code section 17200 (" UCL" ) Unfair Competition Claim (" Pl. Condit. Mot.," Dkt. No. 175). The Court held oral argument on these matters on April 3, 2014. Having considered the parties' briefing and oral arguments, relevant legal authority, and the record in this case, the Court: (1) DENIES CashCall's Motion on the Conditioning Claim; (2) DENIES CashCall's Motion on the Unconscionability Claim; and (3) GRANTS Plaintiffs' Cross-Motion on the EFTA violation for the reasons set forth below.
CashCall makes high interest unsecured personal loans to qualifying consumers. Holland Decl., ¶ 2, Dkt. No. 173. On July 1, 2008, Plaintiffs initiated this class action lawsuit against CashCall, in which they contend that CashCall's loans violate consumer protection laws and are unconscionable. Dkt. No. 1. The Court granted class certification on November 15, 2011. Class Cert. Order, Dkt. No. 100. CashCall now moves for partial summary judgment as to the First Cause of Action for violation of the Electronic Fund Transfer Act (" EFTA" ), 15 U.S.C. § 1693 et seq., and Federal Reserve Regulation E, 12 C.F.R. § 205 et seq. (the Conditioning Claim); the Fifth Cause of Action for Violation of the UCL based on unlawful violation of the EFTA; and the issue of actual damages. Plaintiffs move for summary judgment as to the Conditioning Claim and the UCL Claim. CashCall also moves for summary judgment as to the Fourth Cause of Action for violation of the UCL based on unconscionable loan terms pursuant to California Financial Code section 22302.
B. The Conditioning Claim
Plaintiffs' Conditioning Claim is asserted on behalf of a " Conditioning Class" consisting of " all individuals who, while residing in California, borrowed money from CashCall, Inc. for personal, family or household use on or after March 13, 2006 through July 10, 2011 and were charged an NSF fee." Class. Certification Order at 38. The class includes 96,583 borrowers,
who were charged NSF fees that Plaintiffs now seek to recover as damages under the EFTA. Pl. Opp'n to Condit. Mot. at 1, Dkt. No. 188. Plaintiffs also seek to recover statutory damages under the EFTA, which are capped at the lesser of $500,000 or 1% of CashCall's net worth. Id.
The promissory notes used by CashCall during the class period contained an Electronic Funds Authorization and Disclosure (" EFT Authorization" ) that stated in relevant part:
ELECTRONIC FUNDS AUTHORIZATION AND DISCLOSURE
I hereby authorize CashCall to withdraw my scheduled loan payment from my checking account on or about the FIRST day of each month. I further authorize CashCall to adjust this withdrawal to reflect any additional fees, charges or credits to my account. I understand that CashCall will notify me 10 days prior to any given transfer if the amount to be transferred varies by more than $50 from my regular payment amount. I understand that this authorization and the services undertaken by CashCall in no way alters or lessens my obligations under the loan agreement. I understand that I can cancel this authorization at any time (including prior to my first payment due date) by sending written notification to CashCall. Cancellations must be received at least seven days prior to the applicable due date.
Def.'s Sep. Stmt. in Supp. of Condit. Mot. (" Def. Condit. Stmt." ) No. 1, Dkt. No. 160 (emphasis added); Stark Decl. in Support of Pls.' Mot. (" Stark Decl." ), Ex. 3, P0352; Ex. 4, CC000445, Dkt. No. 177.
In order to obtain a loan, all Conditioning Class Members were required to check a box indicating that they authorized CashCall to withdraw their scheduled loan payments from their checking accounts on or about the first day of each month. Pls.' Sep. Stmt. in Supp. of Cross-Mot. (" Pl. Condit. Stmt." ) No. 5, Dkt. No. 175-1. If a borrower did not check the box, the borrower could not obtain a loan from CashCall. Id., No. 6. During the class period, CashCall would not and did not fund any loans to Class Members who did not check the check box on their CashCall promissory notes indicating that they authorized CashCall to withdraw their scheduled loan payments from their checking accounts on or about the first day of each month. Id., No. 7. However, once funded, Borrowers had the right to cancel the EFT Authorization at any time, including prior to the first payment, and to make any or all of their loan payments by other means. Def.'s Resp. to Pl. Condit. Sep. Stmt., No. 9, Dkt. No. 207. Of the 96,583 members of the Conditioning Class, 15,506 (16%), canceled their EFT Authorization at some point after the loan funded. Id., No. 10.
The parties' cross-motions for summary judgment concern whether CashCall violated Section 1693k(1) of the EFTA, which prohibits " conditioning the extension of credit" on a borrower's " repayment by means of preauthorized electronic funds transfers (" EFT" )." Def. Condit. Mot. at 1 (citing 15 U.S.C. § 1693k(1) and Federal Reserve Regulation E, 12 C.F.R. § 205). CashCall argues that the EFT Authorization contained in its promissory note did not violate the EFTA because the Act prohibits lenders from imposing EFTs as the exclusive method for consumers to repay a loan in its entirety, and CashCall's promissory notes authorized, but did not require, payment by EFT. Id. at 2. CashCall also argues that the fact that it allowed other means of payment from the inception of the loans establishes that it did not condition the extension of credit on repayment by EFT. Id. at 3.
C. Actual Damages
In conjunction with its Motion for Summary Judgment on the Conditioning Claim, CashCall also moves for partial summary judgment on the issue of actual damages, arguing that Plaintiffs cannot establish that CashCall's initial EFT Authorization caused borrowers to incur NSF fees in every instance. Id. at 1-2. Of the class members who incurred NSF fees, CashCall directs the Court's attention to Class Representative Lori Kemply, who incurred fees because her estranged husband made unauthorized withdrawals from her bank account. Def.'s Reply Stmt. No. 4, Dkt. No. 212. She also incurred NSF fees after cancelling her first EFT authorization, paying by other means, and then providing a new EFT authorization. Id. Lori Hume and Tonya Gerald incurred NSF fees after they instructed their banks to stop honoring CashCall's attempts to debit their accounts without first cancelling their EFT authorizations. Id., No. 5.
D. The Unconscionability Claim
The Court also certified a class based on the allegation that CashCall's installment loans charged an unconscionable rate of interest. Class Cert. Order at 38. The Loan Unconscionability Class is comprised of " [a]ll individuals who while residing in California borrowed from $2,500 to $2,600 at an interest rate of 90% or higher from CashCall for personal family or household use at any time from June 30, 2004 through July 10, 2011." Id.
CashCall's loans are offered to subprime borrowers, or those with FICO scores on average less than 600. Pls.' Sep. Stmt. Undisp. Mat. Facts in Supp. of Unc. Mot. (" Pl. Unc. Stmt." ) No. 13, Dkt. No. 196. From 2004 to the present, the default rate for the $2,600 loan product has been 35% to 45%. Id., No. 5. The total default rate for loans in the Class was 45%. Id., No. 41. CashCall rejected more than 72% of loan applications during this time. Id., No. 15.
CashCall's signature product is an unsecured $2,600 loan with a 42 month term, using only simple interest, and without prepayment penalty. Id., No. 17-19. This is the lowest amount offered to members of the Class. Id., No. 16. CashCall has charged varying interest rates on its $2,600 loan product during the Class Period. Prior to the beginning of the Class period, the interest rates on these loans were 79% and 87%. Id., No. 20. CashCall determined it could not make a profit at these interest rates. Id., No. 21. From August 18, 2005 to July 2009, CashCall set the interest rate at 96%. Id., No. 22. In August 2005, CashCall also added a bold-print warning to its promissory notes:
THIS LOAN CARRIES A VERY HIGH INTEREST RATE. YOU MAY BE ABLE TO OBTAIN CREDIT UNDER MORE FAVORABLE TERMS ELSEWHERE. EVEN THOUGH THE TERM OF THE LOAN IS 37 MONTHS, WE STRONGLY ENCOURAGE YOU TO PAY OFF THE LOAN AS SOON AS POSSIBLE. YOU
HAVE THE RIGHT TO PAY OFF ALL OR ANY PORTION OF THE LOAN AT ANY TIME WITHOUT INCURRING ANY PENALTY.
Id., No. 23. Beginning in July 2009, CashCall increased the interest rate to 135%. Id., No. 24. On September 27, 2010, CashCall also started charging more than 90% on its $5,075 loans. Id., No. 25.
During the class period, CashCall made a total of 135,288 loans with interest rates above 90%. Id., No. 6. Of those loans, 60,981, or 45.1%, defaulted. Id., No.7. Of this number, 5,401 defaulted without any repayment of principal. Id., No.11. Conversely, 58,857, or 43.7%, of the signature loans were repaid in full prior to the end of the loan term. Id., No. 8. Of these loans, 5,651 were paid off within one month of origination. Id., No. 9. Another 23,723 loans were paid off within six months of origination. Id., No. 10. Only 8,858 of the loans were repaid in full after going to the full term of the loan. Id., No. 12. Of the Class, 29,039 borrowers, or 21.5%, have taken out more than one loan from CashCall. Id., No. 14. CashCall does not allow borrowers to take out a second loan to repay an outstanding CashCall loan. Post Decl. in Supp. of Unc. Mot. at ¶ 5, Dkt. No. 171.
1. CashCall's Business Model
CashCall's loans have a 42-month amortization period. CashCall recovers its principal loan amount of $2,600 in 12 months. Seiling Decl. in Support of Unc. Mot., Ex. C (" McFarlane Rpt." ), ¶ 81, Dkt. No. 172. CashCall also incurs costs in making its loans. Loan origination costs, servicing costs, and cost of funds comprise on average 58% of the loan amount. Id. In order to recoup these costs, plus any out-of-pocket expenses, CashCall must thus collect payments totaling 158% of the loan amount. Id. For its 96% APR loans with monthly payments of $216.55, CashCall recovers 158% of the loan amount at month 19. Id. For its 135% APR loans with monthly payments of $294.46, CashCall recovers the $2,600 loan amount by month nine, and recovers the loan amount plus out-of-pocket expenses by month 14. Id. The average life of the $2,600 loans was 20 months. Def. Unc. Stmt., No. 27, Dkt. No. 206. Due to the 42-month loan term, CashCall can still earn a profit even if the borrower defaults before the maturity date. McFarlane Rpt. ¶ 100.
Since it was founded, CashCall has pursued a business strategy of aggressive growth. Def. Unc. Stmt., No. 28. The centerpiece of this strategy has been to increase and maintain high loan volumes, including on its $2,600 loans. Id., No. 29. Although CashCall incurred losses in the financial crisis, it recovered in 2010, and in 2011 had profits of $60 million. Id., Nos. 30-31.
CashCall is licensed by the California Department of Business Oversight (the " Department" ), formerly known as the Department of Corporations Department. Def. Unc. Stmt. No. 1, Dkt. No. 167. As part of its licensing obligations, CashCall must file annual reports with the Department. Baren Decl. ¶ ¶ 3-12, Ex. A-H
(CashCall's Annual Reports for 2004-2011). Id., No. 2. The Department additionally conducted audits of CashCall in 2004, 2007, and 2010. Id., No. 3; Baren Decl. ¶ 13-16, Ex. I-K. None of the audits objected to CashCall's practice of charging interest rates above 90% on loans over $2,600. Id., No. 4. Under the Financial Lender's Law, interest rates on loans with principal amounts above $2,500 are not regulated. Cal. Fin. Code § 22303. The Financial Code nonetheless authorizes the Department to take action against improper charges by licensees. Id. § § 22700-13.
2. CashCall's Market Share and Availability of Alternative Products
Up until 2007, CashCall offered a unique product in the subprime credit market because it offered an installment loan based on a simple interest calculation, with no prepayment penalty, that occupied the niche between payday loans and regular bank loans. Levy Decl. in Opp'n to Unc. Mot., Ex. 7 (" Levitin Rpt." ) (citing ...