'Like needing a life preserver and getting an anvil' - Feds sue to stop online lender from collecting
This ad for an online payday lender, once ubiquitous, is off the air for now.
Borrow $10,000 from a website, pay back $62,000 over seven years: Who would have a problem with that?
Federal and state regulators said they did on Monday, and announced a lawsuit against online loan servicer CashCall, saying the firm essentially used Indian reservation-based Western Sky Financial as a front to charge and collect exorbitant -- at it claims, illegal -- interest rates from web borrowers.
The Consumer Financial Protection Bureau lawsuit, filed in conjunction with a series of state attorneys general, holds that consumers around the country do not have to repay these loans because they violate federal law. The suit also seeks punitive damages against CashCall.
"CashCall and its wholly owned subsidiary, WS Funding, entered into an arrangement with Western Sky to secure high-cost, consumer-installment loans that – purportedly – did not have to comply with state law," the lawsuit says. "WS Loans, though made in Western Sky’s name, were marketed by CashCall, financed by WS Funding, almost immediately sold and assigned to WS Funding, and then serviced and collected by CashCall."
Western Sky, which shut down lending operations earlier this year, has attracted plenty of attention from state and federal regulators.
Ed Mierzwinski, senior fellow of consumer advocacy group PIRG, called the arrangement "Rent-A-Tribe."
Earlier this year, a federal court said reservation-based Western Sky was not exempt from federal consumer protection law.
The rates were staggering and could reach more than 300 percent annually. With added fees, the deals sound even worse. According to a chart published in the lawsuit, a Western Sky consumer who borrowed $850 would only get $500 after a $350 fee, and then would have to pay a $350 fee, and then make 12 payments of $150.72.
"You cannot avoid federal law simply because you operate online," CFPB director Richard Cordray said in a conference call announcing the lawsuit.
North Carolina Attorney General Roy Cooper said his office had received numerous complaints about CashCall. One consumer borrowed $2,600, made payments of more than $4,000 over 14 months, and still owed $2,500 on her loan.
"Getting one of these loans is like needing a life preserver and getting an anvil," he said.
Cordray said his agency would continue to work with state officials to stop other similar "regulatory evasion schemes," and would pay close attention to online lending.
"The Internet is a convenient place for consumers and companies to do business, but we cannot allow it to become the wild west ... for irresponsible lending," he said.
CashCall did not immediately respond to a request for comment.