Cadwalader attorneys reviewed a recent court filing concerning the ongoing challenge to the "bank origination model" (i.e., when lenders use arrangements with unaffiliated banks to originate their loans).
According to the Complaint in Barnabas Clothing, Inc. et al. v. Kabbage, Inc. et al., No. 18-3414 (C.D. Cal. filed Apr. 24, 2018), a purported marketplace lender, Kabbage Inc. ("Kabbage"), violated state and federal laws during the advertisement and operation of short-term loans. A clothing retailer, Barnabas Clothing, Inc. ("Barnabas"), alleged that Kabbage marketed a repayment schedule for six-month loans that was very different from the actual schedule which "exceed[ed] California's maximum legal interest rate." While Kabbage purports to be a marketplace lender, Barnabas argued that it is a direct lender and "enters into sham transactions" with a bank to circumvent California usury laws.
As explained more fully in the memorandum, California Federal Courts have issued opposing decisions on the "bank origination model." One court determined that based on the "face of the transactions," the bank was the true lender as the originator of the loans. However, another court decided that an alleged payday lender was the true lender, disregarding the loan originator.
If Kabbage is unsuccessful in its motion to compel arbitration, Judge Philip Gutierrez is expected to reconcile the conflicting decisions on the "bank origination model."
The memorandum was authored by Scott Cammarn, Jonathan Watkins, James Fee, William Simpson, Chris Gavin and Kyle DeYoung. It follows up on previous analysis regarding federal court cases related to marketplace lending.
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