In a March 16th decision, a federal magistrate judge in California ordered a lender to pay $500,000 in statutory damages under the Electronic Funds Transfer Act (“EFTA”) for conditioning online loans on borrowers’ agreements to repay such loans through automatic electronic funds transfers. Under the EFTA (15 U.S.C. §1693k), a lender may not condition an extension of credit on a consumer’s repayment by means of preauthorized electronic fund transfers (“EFTs”). The opinion in the case, Kempley v. Cashcall, Inc., notes that this is apparently the first court since the EFTA’s enactment to apply the EFTA’s civil damages provision in connection with a violation of this prohibition.
The online lender in the case made loans to high-risk borrowers. The lender required such borrowers to check a box as part of the online loan application process to authorize automatic preauthorized payments from their bank accounts to repay the loans. The borrowers successfully argued that this practice violated the EFTA’s prohibition on conditioning a loan on repayment by EFTs. The court imposed the maximum statutory penalty of $500,000 in connection with a class action for a violation of the EFTA.
The class members also sought actual damages from the lender in the amount of $2.4 million. This amount represented nonsufficient fund fees charged by the lender when EFTs were not honored by the borrowers’ banks. The lender charged a $15 fee each time a borrower’s bank declined to make payment for nonsufficient funds. The class members argued that these fees would not have been incurred if the lender had not required EFTs as the means of repayment of the loans. The court rejected this argument, however, and refused to award any actual damages based on expert testimony and other evidence indicating that most customers would have chosen to repay their loans through EFTs even if such repayment method was optional. The court also refused to award restitution under California’s unfair competition law, which prohibits unfair or fraudulent business acts or practices.
The statutory damage award of $500,000, however, clearly represents a cautionary tale for online lenders relying on EFTs for repayment. Kempley shows that online lenders need to exercise caution when obtaining agreements from consumers to repay loans through EFTs. While such repayment method is clearly convenient and efficient, lenders need to ensure it is optional and that their online applications and agreements reflect this.