The federal government’s crackdown on abusive financial practices that take advantage of the working poor is ramping up even before the new cop on the beat – the Consumer Financial Protection Bureau – steps into the fray.
The Federal Trade Commission on Monday filed suit against a payday lender operation headquartered on a Native American reservation that allegedly bilked low-wage workers of tens of millions of dollars by charging annual interest rates as high as 685 percent for short-term loans. The FTC is seeking a court injunction to stop AMG Services Inc. of Overland Park, Kansas, and affiliated companies from continuing to operate while the government pursues the case.
“They’ve had a number of states go after them without success,” said Nikhil Singhvi, an FTC staff attorney. “There’s no tribal immunity for a case brought by the federal government.”
One of the defendants who allegedly controlled the lending companies is automobile racer Scott Tucker, according to the FTC. Tucker and his brother Blaine Tucker allegedly transferred more than $40 million dollars collected from consumers to Level 5 Motor Sports, which sponsored Tucker’s racing career.
An attorney also named as a defendant in the complaint, Timothy J. Muir, did not return phone calls seeking comment.
Cash-strapped workers who borrow from payday lenders pledge future earnings to pay off short-term loans, usually by giving the lender electronic access to the borrower’s bank account. Loans range in size from $100 to $1,000, depending on state limits, with the average loan repayment period of two weeks. Finance charges can range from $15 to $30 per $100 borrowed – an annual interest rate of 400 percent or more.
“These are usurious loans that draw money from working families’ ability to make ends meet,” said Jean Ann Fox, who advocates for stricter rules on payday lenders for the Consumer Federation of America. The FTC has brought over a dozen cases against payday lenders in recent years. “The CFPB is only getting up and running on this issue. We expect them to expend a lot of resources on cracking down on abusive short-term lending.”
Richard Cordray, the first director of the CFPB, devoted the agency’s first public hearing to the issue. It was held in Birmingham, Ala., last January because that city has one of the highest concentrations of payday lending operations in the country and the City Council recently enacted a six-month moratorium on start-ups because of their proliferation.
The CFPB recently released a draft guidance on how it plans to police the industry, which generates an estimated $7 billion a year in fees. While recognizing that the industry can provide a service to low-income workers without access to credit cards, Cordray expressed concern that many workers fall behind and never escape the debt trap.
“Trouble strikes when they cannot pay back the money and that two-week loan rolls over and over and turns into a loan that the consumer has been carrying for months and months,” he said at the hearing. “Soon they are living off money borrowed at a rate of 400 percent.”
The payday lending industry has launched a massive lobbying campaign to roll back or slow down the new controls on payday lending contained in the Dodd-Frank financial services reform bill. They’ve also made major donations to Restore Our Future, a “Super PAC” that supports the candidacy of Mitt Romney, the former governor of Massachusetts and the frontrunner for the Republican nomination who has pledged to roll back the Dodd-Frank bill.
According to a recent report in USA Today, payday lenders that donated $25,000 or more to Restore Out Future included Advance America of Spartanburg, S.C.; Jones Management Services of Cleveland, Tenn.; Community Choice Financial of Dublin, Ohio; and QC Holdings of Overland Park, Kan. QC Holdings, though located in the same Kansas town as AMG Services, was not named in the complaint.