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The Consumer Financial Protection Bureau announced Monday a lawsuit against CashCall for illegal debt-collection actions, which include debiting consumer checking accounts for invalid loans.

Such loans ranged between $850 and $10,000, carried interest rates from roughly 90% to as much as 343% and had terms up to several months long.

The CFPB is suing California-based CashCall Inc.; its subsidiary, WS Funding LLC; its affiliate, Delbert Services Corp., a debt-collections agency; and the owner of all three, J. Paul Reddam. CashCall and WS Funding began working with online lender Western Sky Financial in late 2009, the CFPB reports. Western Sky was based on a Native American reservation in South Dakota and was owned by a member of the Cheyenne River Sioux Tribe, so the company claimed it was not subject to state laws. However, the CFPB counters that the law does not, in fact, work that way.

The CFPB argues that Western Sky made loans to consumers in various states, meaning the loans should have met those states’ regulations. The agency alleges that Western Sky’s high-cost loans violated interest-rate caps or loan-licensing requirements (sometimes both) in at least eight states — Arizona, Arkansas, Colorado, Indiana, Massachusetts, New Hampshire, New York and North Carolina — voiding those loans and making them uncollectable.

In September, Western Sky ceased loan operations and closed for business after several states began investigating the company; however, the CFPB says that CashCall and Delbert continued to collect payments from consumers with invalid Western Sky loans.

“Today we are taking action against CashCall for collecting money it had no right to take from consumers,” said CFPB Director Richard Cordray in a news release. “Online lending is rapidly growing and deserves ample regulatory attention. The Consumer Financial Protection Bureau will take action against online lenders and servicers that engage in unfair, deceptive, or abusive practices.”

The CFPB wants CashCall to refund the money it illegally took from consumers, in addition to any damages or civil penalties those consumers suffered as a result of CashCall’s practices. This is the first action the CFPB has taken against an online lender.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the bureau has the authority to enforce penalties on institutions that violate consumer protection laws, and the agency sees this lawsuit is not only a step toward aiding consumers who have already suffered, but also a way of preventing further damage.

“These loans — and this is perhaps the most important part — are often marketed to … consumers living paycheck to paycheck, people who have very limited means,” said Abigail Kuzma, Indiana deputy attorney general. She and other state attorneys general/deputy attorneys general joined Cordray on a press call announcing the action. Kuzma said Indiana residents had also complained of harassment by debt collectors and that the automatic debits referenced in the lawsuit had caused consumers to overdraft their checking accounts.

Short-term loans can be helpful for consumers in a bind, and online lenders make such resources easily accessible. But these products can be very costly to consumers in the long term, leaving already cash-strapped individuals in a cycle of debt. Consumers often turn to short-term loans when they have little access to other forms of credit, but the difficulty of repaying short-term loans can cause problems for a consumer’s credit profile, meaning they may continue to struggle obtaining other loans and credit cards.

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