Marketplace lenders face the prospect of another disruption to their business model after a federal court in California ruled this week that an online loan servicer illegally collected debt on behalf of a tribal lender, bypassing state laws on usury caps.

The marketplace-lending sector, which includes peer-to-peer lending, has already started to change the way it operates in response to another recent case. That case, Madden v. Midland Funding LLC, turned away by the U.S. Supreme Court this summer, determined that a debt buyer couldn't be exempted from state usury caps by purchasing debt from a bank that enjoyed such exemptions.

U.S. District Judge John Walter ruled in favor of the Consumer Financial Protection Bureau (CFPB) when he determined CashCall Inc., a California online loan servicer, was the "true lender" behind the transactions in question—not Western Sky Financial, an online tribal lender in South Dakota.

"I don't think this means the CFPB will target marketplace lenders," said James Kim, a former senior enforcement attorney at the CFPB who is now at Ballard Spahr LLP. "Having said that, it's still dangerous for marketplace lending because state authorities and plaintiffs' lawyers will use this case against them."



People