CFPB sues tribal lenders, seeks refunds for customers
Expert on consumer credit laws and regulations
The government's consumer watchdog agency has filed a lawsuit against four tribal-owned online lenders, saying many of their high-cost loans are void because they violated state or federal laws.
"We allege that these companies made deceptive demands and illegally took money from people's bank accounts," said Richard Cordray, director of the U.S. Consumer Financial Protection Bureau, in a statement.
The lawsuit, filed in the U.S. District Court in Chicago, seeks restitution and refunds for illegally collected money, as well as a halt to the practices.
The CFPB lawsuit names Golden Valley Lending Inc., Silver Cloud Financial Inc., Mountain Summit Financial Inc., and Majestic Lake Financial Inc.
The companies are owned by the Habematolel Pomo of Upper Lake Indian Tribe, a federally recognized tribe in Upper Lake, California, according to the lawsuit. The tribe owns a call center in Overland Park, Kansas, that provides customer service for the companies.
An attorney for the tribe said the CFPB's accusations overstep its powers. "This is shocking governmental overreach," Brant W. Bishop of Wilkinson Walsh & Eskovitz in Washington, D.C., said in an email. The tribe was working with the CFPB to demonstrate its businesses are in compliance with the law when it was hit by the surprise lawsuit, Bishop said.
Starting with Golden Valley Lending in about 2012, the companies made online installment loans that sometimes failed to disclose their annual percentage rate, or exceeded state usury limits or licensing requirements, the CFPB's complaint states. Loans carried annual interest rates of between 440 percent up to 950 percent.
The companies' volume of installment loan business was described as "large" in the complaint. While totals were unavailable, the companies had more than 597,000 credit inquiries performed between February 2013 and June 2016, the complaint states. On a single day in October 2013, Golden Valley originated, or tried to originate, 235 loans ranging from $300 to $1,000.
The agency said loans were flawed in 17 states (Arizona, Arkansas, Colorado, Connecticut, Illinois, Indiana, Kentucky, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio and South Dakota). Attorneys general in some states have written cease-and-desist letters to the lenders citing alleged violations of state interest rate caps and license requirements.
What should borrowers
While the CFPB is seeking refunds for people who did business with the companies, there is no determination yet that loans will be erased or money refunded, a CFPB spokesman said in an email interview.
Asked what borrowers who owe money to the companies should do while the lawsuit is pending, the CFPB provided this statement:
"If the CFPB obtains consumer redress or a civil penalty is awarded, affected consumers may be eligible for compensation. There has not yet been a determination whether any consumers will be eligible for compensation. If that happens, eligible consumers will be contacted.”
Consumers affected by these practices, the agency added, can file a complaint with the CFPB through its website: https://www.consumerfinance.gov/complaint/
Kathleen Engel, research professor at Suffolk University Law School in Boston, recommended that customers of the four companies take this step, to make sure the agency has their names in case refunds of excess interest are paid at some point. Those customers living in the 17 states where usury or licensing laws may have been violated should also consider filing a complaint with the state's attorney general, she said.
How the loans work
According to the lawsuit, the four companies' standard terms involve a loan with 20 payments over 10 months, or a payment every two weeks. For each payment there is a fee, often equal to $30 for every $100 in principal outstanding. The payment also includes 5 percent of the original principal.
For example, an $800 loan would typically cost the borrower repayments of about $3,320 over 10 months, including the repayment of principal, the complaint states.
The lawsuit faces the question of whether the lending activity of a recognized, sovereign Indian tribe is subject to federal jurisdiction through the consumer protection bureau.
"I would expect the defendants to raise their tribal status as a defense," said Hilary B. Miller, a Connecticut attorney and expert in tribal sovereign immunity issues.
In 2016 the CFPB won a lawsuit involving Western Sky Financial, based on an Indian reservation and owned by a tribal member. However, that case found that an outside service provider called CashCall Inc. was the real business behind the scenes. Because CashCall bore the risk of the loans, the court found that it was the lender and subject to state laws such as licensing and usury limits.
The CFPB's new case against the four online lenders states that most of their operations are conducted in Kansas, without a storefront lending presence on tribal land. At least three of the companies obtained financing from non-tribal business, the complaint states.
The complaint alleges violations of the Truth in Lending Act and the U.S. Consumer Financial Protection Act. It seeks restitution of money that borrowers paid involving illegal loans, plus penalties and a halt to the practices.
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