Payday Lenders Banned by Federal Trade Commission

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Situation:

Under the terms of a settlement with three companies, the Federal Trade Commission (FTC) obtained a permanent ban on the owners and operators of a payday lending scheme that overcharged consumers millions of dollars.

This settlement also provided that nearly all outstanding consumer debt—made up entirely of illegal finance charges—held by the three payday lending companies should be marked as paid in full.

The FTC published two press releases that we relied upon to produce this case study. We also found a corroborating newspaper article, and we provide links below.

Learning Objectives:

Upon completion of this Case Study, participants should:

Understand aspects of payday lending practices;
Describe ways consumers can avoid falling prey to payday lending schemes;
Explain penalties for criminal payday lending schemes;
Identify other types of predatory lending practices beside payday loans; and
Learn about the Telemarketing Sales Rule, the Electronic Funds Transfer Act, and the Truth in Lending Act.

State of the Industry:

The FTC governs lending practices in the United States. Regulators consider Payday Loans as a form of “predatory lending.” From the perspective of government investigators, predatory lending practices are either sketchy or blatantly fraudulent. Predatory loans, or subprime lending, typically relies on risk-based pricing. Such loans serve borrowers that cannot obtain credit in the prime lending market. When lenders couple high interest-rate loans with unscrupulous practices that pressure borrowers, authorities deem the loans as predatory.

Legislators develop laws to prevent unscrupulous lenders from preying on low-income residents. Frequently, those people live in low-income neighborhoods. Authorities consider it their responsibility to protect vulnerable populations and move aggressively to investigate and prosecute people that “prey” upon such populations with predatory loans.

Because predatory lending practices still exist, Lenders should learn how easily they can run afoul of consumer-protection laws.

Background and Analysis:

This case study profiles three companies:

Harvest Moon Financial (HMF),
Gentle Breeze Online (GBO), and
Green Stream Lending (GSL).

Some defendants target low-income neighborhoods to exploit consumers with loans that government investigators construe as being predatory, such as payday loans. According to the Consumer Protection Finance Bureau (a government-run consumer watchdog agency (www.consumerfinance.gov)), Payday Loans are short-term, high-interest loans based on the borrower’s income.

Payday lenders charge borrowers interest rates that far exceed the rates that conventional lenders charge. The payday lenders do not require any collateral, such as a mortgage on a house or a lien on an automobile. Further, payday lenders may also extend unsecured personal loans.

Consumer protection groups, such as the Better Business Bureau pay close attention to Payday lenders. If agents at the BBB suspect predatory lending practices, they contact authorities to launch an investigation. Investigators take a cynical view of payday lenders, due to their notorious reputation of exploiting people.

Payday lenders have a history of charging extremely high interest rates, and target people that are unlikely to repay on time, trapping borrowers into a vicious cycle of debt. The lending contracts frequently include provisions that charge added fees, but those provisions may appear in small print. Since consumers do not see the requirements so readily, government investigators believe the lenders act deceptively. Two notorious industries that use predatory lending practices include auto financing and pawn shops.

According to the Federal Trade Commission, HMF, GBO, and GSL used deceptive marketing. They schemed to convince consumers that their loan terms would result in a fixed number of payments for repaying the loan in full.

The FTC’s investigations found that consumers paid on loans for far longer than the consumers anticipated. The lenders locked borrowers in a cycle of paying interest rates, without reducing the principal. According to the FTC, the lenders deceived consumers because the consumers did not know their payments went to serve finance charges rather than reducing debt.

The FTC accused the defendants of failing to make disclosures in accordance with:

The Telemarketing Sales Rule,
The Electronic Funds Transfer Act,
The Truth in Lending Act.

Legislators enacted those consumer-protection laws to encourage fair trade and full disclosure.

In May 2019, the U.S. The District Court for the District of Nevada entered a temporary restraining order against the three defendants. The restraining order required the defendants to cease operations, and it froze all of the defendants’ assets. In addition, prosecutors filed criminal information with the Court.

Instead of going through a lengthy trial, the defendants chose to settle the case. The terms of the March 2021 settlement permanently prohibit HMF, GBO, and GSL, from making loans or extending credit of any kind. The settlement includes a monetary judgment of $114.3 million, partially suspended based on the defendants’ inability to pay.

Further, the settlement required defendants to turn over corporate and some personal assets, along with several vehicles to a federal receiver. The federal receiver will wind down and liquidate the businesses and provide all proceeds to the FTC (after the receiver takes a substantial cut of those revenues). In addition, as part of the settlement, the FTC put other terms and restrictions on the defendants.

Recommendations

All businesses that serve consumers should learn about practices that can lead to FTC investigations.

Lenders, and the team members that work for “predatory lenders,” should understand laws and regulations to avoid becoming subject to sanctions that could cripple the business, and lead to criminal sanctions.

In order to avoid an investigation and prosecution by the FTC, lenders should implement compliance training that teaches all team members about ethical lending practices. People that work in the lending industry should have a full grasp of laws governing predatory lending practices.

The Department of Justice offers guidelines that prosecutors follow when determining whether to bring criminal charges against a company. If the company can show that it has learned from the industry, the company may build arguments that favor deferred prosecution. Compliance training represents a great defense mechanism that companies and people that work for companies can use to protect themselves against accusations of fraud and unethical lending practices.

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Sources

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