Jurisprudence

A Judge Said a Lending Tycoon Didn’t Know He Was Breaking the Law. Should That Matter?

CashCall argues it should be allowed to keep the money it scammed from customers.

J. Paul Reddam in front of a CashCall ad
CashCall owner J. Paul Reddam.
Photo illustration by Slate. Photo by Kevin C. Cox/Getty Images and CashCall.

“CASHCALL ENJOYS DESTROYING OTHER PEOPLES LIVES AS THEY ARE DOING AND HAVE DONE TO ME.”

That accusation came from a customer who took out a loan that came with a 100 percent interest rate, according to his August complaint to the Consumer Financial Protection Bureau. It’s among a chorus of complaints against CashCall, a lender that charged interest rates north of 100 percent and as high as 343 percent in some cases. The company is now largely defunct after being buried in legal and regulatory actions. But its founder might just get away with the shady patterns that made CashCall such a profitable enterprise.

John Paul Reddam, a former philosophy professor at Cal State–Los Angeles, founded CashCall in 2003. He was already a wealthy man; as reported in the Los Angeles Times, he’d sold his first company, the mortgage lender DiTech, four years earlier in a deal estimated at $275 million. CashCall started as a California-based lender, but Reddam, the company’s CEO and sole owner, wanted to expand outside the state—from 2011–13, CashCall granted at least $269 million in loans across 17 states. Unlike payday loans, which are often for amounts as small as $300, CashCall’s loans were much larger, some as large as $10,000; borrowers who fell behind on their loans were subject to as many as 20 phone calls per day. Four in every 10 CashCall borrowers defaulted on their loans; by comparison, even risky payday lenders frequently average default rates under 10 percent.

Importantly, CashCall granted these loans in states like Virginia, New York, and North Carolina with usury laws capping interest rates at much lower levels. In many of the states where CashCall borrowers live, if you lend someone money with an illegally high interest rate, the whole loan is void. Therefore, many of CashCall’s borrowers had no legal obligation to repay their loans. Reddam and his attorneys thought CashCall could get away with skirting state laws because he’d teamed up with Martin A. “Butch” Webb, a member of the Cheyenne River Sioux Tribe. At CashCall General Counsel Daniel Baren’s suggestion, Webb founded Western Sky Financial LLC to issue the loans, which were approved or denied according to criteria that CashCall provided; within three days, CashCall bought all the loans and sent the borrowers letters telling them to start sending payments CashCall’s way. According to CashCall lawyers, since Webb belonged to the Cheyenne River Sioux Tribe, he’d get “tribal immunity.” Webb’s company wouldn’t have to comply with state or federal laws, and Reddam could still call the shots.

This didn’t fool the federal court. In 2018, District Judge John F. Walter concluded that it was really CashCall, not Western Sky, that had been doing all the lending, and found that CashCall had violated the Consumer Financial Protection Act. The CFPB had argued that CashCall should have to pay a $51 million civil penalty, or $27,631 for each day that CashCall broke the law, and refund as restitution all $236 million in interest and fees it had illegally collected from borrowers. Walter agreed CashCall had broken the law but disagreed about the consequences, ruling there wasn’t enough evidence that Reddam and CashCall had “intended to defraud consumers.” So he charged Reddam and CashCall a $10.2 million penalty, just 4 percent of what the CFPB had argued was fair, and decided not to award the consumers any restitution.

The CFPB appealed the judgment. In oral arguments on Sept. 9 before the 9th U.S. Circuit Court of Appeals, CFPB attorney Kristin Bateman argued that, since “for years, CashCall and the other defendants told consumers that they owed money that they did not actually owe,” the consumers should be refunded all the interest and fees. According to the CFPB’s argument, that’s true regardless of whatever thoughts were inside Reddam’s head at the time he was illegally collecting on the debt.

The case is now in limbo amid a flurry of lawsuits seeking to take down the CFPB. CashCall was one of several companies that responded to enforcement actions by arguing that the CFPB shouldn’t even be allowed to exist. These companies argue that because the president can’t hire and fire the CFPB’s director at will, the director isn’t sufficiently accountable, violating principles of “separation of powers.” Last month, Kathy Kraninger, the Trump-appointed director of the CFPB, said she now agrees that the CFPB is unconstitutionally structured, and the Supreme Court is expected to weigh in on that question when it hears Seila Law vs. CFPB later this term. On Oct. 21, the 9th Circuit ordered a stay on proceedings in CFPB vs. CashCall until the Supreme Court’s decision.

Even if the Supreme Court agrees with Seila Law, CashCall will likely still be on the hook. When we spoke by phone, Kent Barnett, associate professor of law at University of Georgia, pointed out that arguing your regulator is unconstitutionally structured can be a “dangerous” strategy for a company like CashCall. He noted that if the courts do rule that the CFPB’s structure is unconstitutional, they’d most likely change the law governing the director and otherwise leave the agency intact. The penalties for companies like CashCall wouldn’t suddenly be voided. The company is arguably just “angering the beast that oversees” it, he said.

But beyond the question of CFPB’s structure, the stakes here for ordinary consumers are high: Should subprime lending tycoons be able to keep the windfalls from illegal activity if they can plausibly argue that they didn’t know what they were doing was illegal? If the answer is yes, what’s to stop people like Reddam from enriching themselves by scamming low-income consumers?

Reporting by the Los Angeles Times suggests another company founded by Reddam, LoanMe, has largely taken CashCall’s place. LoanMe began making loans in 2014, as CashCall’s legal troubles were started to mount. Since then, LoanMe has granted more than $340 million in loans, mostly with interest rates of at least 100 percent, and CashCall employees told the Times that LoanMe was started specifically to evade CashCall’s legal troubles. Reddam no longer owns LoanMe, but, as reported by the Times, it has continued to borrow money from yet another Reddam company, the ALP Funding Trust. Reddam, through his attorney, suggested the Times had misrepresented the extent of his involvement in LoanMe, saying it had depicted “an incorrect, distorted and prejudicial view,” but his attorney did not offer details.

Reddam appears to have followed a tried and true road map for business owners caught in a scam: quietly set up shop under a new name. Voyager Financial Group was banned from the state of Arkansas for defrauding veterans in 2014, only to pop up again under the name Strategic Marketing Innovators; as Andrew Brown from the Post and Courier reported, Voyager Financial Group, Strategic Marketing Innovators, and other companies affiliated with the same operator were able to convince hundreds of veterans to sign over their disability benefits. Texas company JBM Janitorial Maintenance was caught stealing $43,000 in wages in May 2017; in June, the husband of JBM president Viridiana Garcia started a new company that promptly, the Texas Observer reported, bought out most of JBM’s contracts. JBM then went out of business, effectively freeing the entity from its debts.

The judiciary seems sympathetic to Reddam for his professed ignorance. In last month’s oral arguments, Trump-appointed 9th Circuit Judge Ryan D. Nelson questioned how deceptive the tactics really were. The panel of judges and CashCall’s attorney, Allen Lanstra Jr., sparred on when, if ever, CashCall should have realized it was breaking the law. Was it in 2009, when investment bank Jefferies declined to fund the business, pointing out that CashCall’s legal theory that an individual tribe member could claim legal immunity probably wouldn’t hold up in court? Was it in 2011, when authorities from Washington state and Maryland filed complaints?

In other cases, against far more marginalized defendants, courts have affirmed the principle that ignorance of the law is no excuse for breaking it. In Minnesota, the state Supreme Court said the fact that Minnesota had added the stimulant phentermine to its list of controlled substances just one day before sex worker Cleora Olive King was caught with it in her underwear could not be used as a defense. In Wisconsin, Mary Anne Baldwin was ordered to pay $13,382.30 and perform 120 hours of community service for what basically amounted to a paperwork error; when her son went to prison, she was supposed to let the state know he no longer resided with her, since the change in her household size meant she’d no longer be eligible for food stamps. When she failed to do, she was found guilty of misstating or concealing facts in a food stamps application, a felony.

If a Ph.D.-holding magnate who has founded multiple financial services companies can’t be expected to understand and follow the law, who can? The answer to that question will likely determine how much CashCall has to pay its victims.

Of course, while CashCall itself is no longer issuing new loans, other companies affiliated with Reddam are still moving full steam ahead, and Reddam appears to be thriving. Earlier this year, Reddam’s horse, Fore Left, won the Tremont Stakes; his most recent Kentucky Derby win was in 2016.