CFPB and FTC Stop Two Payday Lending Scams

18 September 2014 Consumer Class Defense Counsel Blog

In separate suits brought by the Consumer Financial Practices Bureau (“CFPB”) and the Federal Trade Commission (“FTC”) federal courts have frozen the assets of two separate groups who allegedly defrauded consumers by creating unauthorized payday loans.

Payday loans are short term loans generally made in small amounts that are intended to be repaid out of the borrower’s next paycheck, together with interest. The interest is generally at a very high annual rate, but due to the short anticipated duration of the loan borrowers do not expect to pay a large amount of interest. Consumers often seek online payday loans through websites operated by “lead generators”. Consumers must provide their social security numbers and checking account numbers in order to apply for these loans. This information is then sold to firms who make the loans, according to the CFPB complaint. 

In these cases, the defendants used this information to deposit amounts of $200 or $300 into consumer checking accounts, and then withdrew finance charges of $60 – $90 every two weeks from those accounts, never paying off the principal of the loans. When consumers complained that these loans and withdrawals were unauthorized, the defendants allegedly created bogus loan applications, electronic transfer authorizations and other documents that purported to establish the consumer’s consent to the loan. Accordingly, banks would deny consumer requests to reverse the unauthorized transactions. The only way many consumers could stop the continued automatic withdrawals was to close their accounts. Then, the defendants would sell the allegedly bogus loans to a debt collector, according to the CFPB complaint.

The CFPB complaint alleges that the defendants, based in Missouri, misrepresented that consumers authorized loans; misrepresented loan terms; and committed unfair billing practices by withdrawing funds from bank accounts without consent. The complaint seeks rescission of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten gains, in addition to civil money penalties. The CFPB obtained a court order freezing assets of the defendants before the defendants were made aware of the filing of the complaint.

The case brought by the FTC involved a very similar set of facts and procedure.

Prior cases by the CFPB have focused on the actions of lenders who took advantage of consumers who had initially consented to their loans. These cases indicate that the predatory behavior of some payday lenders has risen to an even higher level. Here, most of the consumers did not even consent to the loans that were made, yet they still were victimized, according to the complaints.

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