The Federal Trade Commission is cracking down on payday loan operators accused of withholding millions of dollars from consumers by keeping them attached to loans that were never authorized, the FTC announced today (July 7).
Under terms of a settlement, the FTC has banned Timothy A. Coppinger, Frampton T. Rowland III, and their companies from operating in the consumer lending business. The decision was due to the parties' participation in misleading online payday loan applicants by depositing funds into the applicants' bank accounts without their knowledge or permission. That led to ongoing finance changes being placed on the applicant, while none of the payments went toward the principal amount owed.
As part of the settlement, Coppinger and his companies and Rowland and his companies will pay $32 million and $22 million, respectively. Once the assets have been paid off, the judgements against these companies will be suspended, the FTC release states, which also notes that if they fail to comply to the agreement, the full amount will be due immediately.
The FTC's news release on the outcome asserts that: "The defendants told consumers they had agreed to, and were obligated to pay for, the unauthorized 'loans.' To support their claims, the defendants provided consumers with fake loan applications or other loan documents purportedly showing that consumers had authorized the loans. If consumers closed their bank accounts to stop the unauthorized debits, the defendants often sold the 'loans' to debt buyers who then harassed consumers for payment."
The defendants were also accused of misleading the applicants about the loans' costs, and even had documents that presented false information about the finance charges, APR, schedule of payments and the total number of payments needing to be made. The documents were said to have placed the necessary information about the loans' costs and conditions buried in the fine print.
Under the terms of the settlement, the FTC claims that the defendants violated the FTC Act, the Truth in Lending Act, and the Electronic Funds Transfer Act.
"Under the proposed settlement orders, the defendants are banned from any aspect of the consumer lending business, including collecting payments, communicating about loans, and selling debt. They are also permanently prohibited from making material misrepresentations about any good or service, and from debiting or billing consumers or making electronic fund transfers without their consent," the FTC agreement states.
Those named in the lengthy list of defendants consist of: Coppinger and his companies, CWB Services LLC, Orion Services LLC, Sandpoint Capital LLC, Sandpoint LLC, Basseterre Capital LLC, Basseterre Capital LLC, Namakan Capital LLC, and Namakan Capital LLC, and Rowland and his companies, Anasazi Services LLC, Anasazi Group LLC, Vandelier Group LLC, St. Armands Group LLC, Longboat Group LLC, doing business as Cutter Group, and Oread Group LLC, d/b/a Mass Street Group.
Just last month, discussions were had in the U.S. Senate about the need for stricter payday lending rules regarding a requirement about how lenders assess consumers’ abilities to repay the loan. The discussion was led by Senate Democrats last month in an attempt to impose stringent policies to reform the industry.
The 32 Senate Democrats urged the Consumer Financial Protection Bureau to consider stronger rules in order to maintain a balance between making resources available for the low-income borrowers and ensuring their ability to repay the loans. The letter that was addressed to the CFPB was organized by Senators Jeff Merkley of Oregon, Dick Durbin of Illinois and Chris Coons of Delaware.
“Predatory lenders should not be able to continue unfair, deceptive, and abusive acts or practices that are designed to trap borrowers in a cycle of debt,” the senators wrote in the letter.
There is another side of the payday loan debate. The CFPB is also considering a proposal that would require lenders to take additional steps to ensure consumers have the ability to repay these loans. The rule would also restrict payment collection methods that apply fees “in the excess.” Their proposal also includes overdrafts extended to customers with prepaid cards. These overdrafts are typically two to three days in length and range between $50 and $90, often as a result of a payroll direct debit payment to that prepaid card.
"The CFPB argues that this overdraft protection is really a loan in disguise, and that consumers who overdraw simply don’t understand that they are setting themselves up to pay overdraft fees on their next payday," MDP CEO Karen Webster wrote in a recent column.
The move to regulate prepaid overdraft fees as payday loans, requiring proof of “creditworthiness” would, according to the CEO of prepaid issuer NetSpend, Chuck Harris, would not only make the product more expensive, but even impact their very viability.
“There is a section of our customers that we fear we won’t be able to serve because of the extensive credit application process. We are concerned with the impact this rule will have on our consumers,” Harris told Webster. "This [potential rule change] is a real issue for our consumers. These are people who had bad experiences with a bank — and for that reason, we didn’t build a product that looks just like a bank product. It’s the antithesis of that.”
It’s also, according to some experts, like using a sledgehammer to kill an ant.
“If the CFPB is going to stop some unscrupulous payday lenders from tricking people into paying high interest rates to borrow money I’m all for it,” MPD Founder and Chairman Dr. David Evans noted. “But, what I’m afraid the CFPB is doing is making it tough for people who need to borrow money, for reasons they probably know, but the CFPB doesn’t, to get loans. Maybe they have an emergency where they can’t get a loan, and they’ll be screwed if they don’t have access to money. Or maybe they’ll go to loan sharks or other really shady lenders that aren’t visible to the CFPB and have their knee caps popped if they can’t pay it back. It doesn’t sound like the CFPB has thought through all the unintended consequences of its planned crackdown.”