California payday lender refunds $800,000 to settle predatory lending allegations

Reporting from Washington —  A California payday lender is refunding about $800,000 to consumers to settle allegations that it steered borrowers into high-interest loans and engaged in other illegal practices, state officials said Tuesday.

California Check Cashing Stores also agreed to pay $105,000 in penalties and other costs in a consent order with the state’s Department of Business Oversight, which has been cracking down on payday and other high-cost consumer loans that critics allege are predatory. The company did not admit guilt in the consent order.

The department, which oversees financial service providers and products, has taken similar actions against four other companies since late 2017 as part of an effort to enforce the state’s limits on interest rates for payday and other small-dollar loans.

In Tuesday’s action, the settlement involves alleged violations regarding administration of payday loans, which are capped at $300, and the steering of borrowers into consumer loans of more than $2,500 to avoid rate caps.

California law limits interest on loans of up to $2,499 at between 20% and 30%, but there is no cap for loans of $2,500 and larger.

“Steering consumers into higher-cost loans to circumvent statutory interest rate caps is abusive,” said Jan Lynn Owen, commissioner of the Department of Business Oversight.

“Consumers deserve protection and access to lending markets that are fair, transparent and comply with the law,” she said.

The action comes as the newly installed chief of the Consumer Financial Protection Bureau is reportedly planning on loosening new federal rules on payday lending that were proposed during the Obama era but have not yet gone into effect.

The proposed federal rules would provide a floor of basic protections for borrowers nationwide, but states would be free to make them tougher, including enacting interest rate caps, which the federal consumer bureau is prohibited from doing.

Richard Cordray, the former head of the bureau who proposed the rules in 2017, said the move by California regulators is another example of why the industry needs to be closely regulated.

“The enforcement actions they’re bringing show that some people are really ignoring what the requirements are supposed to be,” said Cordray, appointed by then-President Obama as the bureau’s first director.

California Check Cashing Stores has about 118 locations statewide and is owned by privately held Community Choice Financial Inc. of Ohio.

“We disagreed with the findings of this but we agreed to the settlement so we can move beyond this and get back to serving our customers in California,” said Patrick Crowley, a spokesman for Community Choice Financial.

In addition to check-cashing services, the California stores offer payday loans, auto title loans and prepaid debit cards, with the company touting on its website that it can help people “Get Cash Fast, In-Store or Online.”

State examiners said they found that, from 2012 to 2017, California Check Cashing Stores overcharged customers interest and fees by steering them into loans of $2,500 or more to avoid the interest rate caps.

The settlement also resolves allegations that the company made “false and misleading statements in its advertising” by saying in brochures that it made loans of “up to $5,000” but had a minimum of “$2,501.”

The consent order requires California Check Cashing Stores to refund about $100,000 related to 1,200 consumer loans.

Most of the refunds — about $700,000 — go to borrowers involved in 3,000 payday loans.

Those loans typically are cash advances on a worker’s paycheck for two to four weeks and carry a flat fee or an interest rate that doesn’t seem particularly high — $45 for the maximum $300 loan. But the cost can quickly add up if the loan isn’t paid off, and the effective annual interest rate can reach 300% or more.

The settlement resolves allegations that California Check Cashing Stores collected charges twice, allowed borrowers to take out a new loan before paying off the old one and deposited some customers’ checks before the date specified in the loan agreement without their written authorization. Typically payday loans are paid back on the date the borrower receives another paycheck.

The consent order requires the company to audit its files for loans that are due refunds and submit a report to the state within 30 days and send out the refunds within 90 days. Current customers will receive a credit in the refund amount; those with a balance less than the refund amount or who paid off the loan will receive a check.

State officials said customers should contact the company if they believe they are due a refund.

The state agency has reached settlements since late 2017 with four other companies — Advance America, Check Into Cash, Quick Cash Funding and Speedy Cash — over various practices the agency said were aimed at improperly pushing loans above the $2,500 threshold.

The state has moved aggressively to rein in payday lenders as efforts to more closely regulate the industry have stalled following the election of President Trump. The president has sought to extend his deregulatory agenda to the CFPB since Cordray stepped down in late 2017 to pursue what turned out to be an unsuccessful bid for governor of Ohio.

The new federal rules developed under Cordray require payday lenders to determine upfront the ability of potential borrowers to repay payday and other short-term loans of 45 days or less.

Current White House Chief of Staff Mick Mulvaney, who replaced Cordray on an interim basis, got a federal judge in November to postpone the August 2019 effective date for most of the rules because of potential changes he wanted to make.

Last month, Kathy Kraninger, Mulvaney’s former White House aide, took over as permanent director of the bureau after being confirmed by the Senate.

The American Banker news site reported last week that Kraninger was expected to remove the ability-to-repay provisions, a move that would certainly draw opposition from the new House Democratic majority.

A CFPB spokesman did not respond to a request for comment.

Cordray said that would be a mistake to get rid of the new underwriting requirements and predicted such a move also would be challenged in court.

“We thought that people should not be put into a loan in the first place unless the lender could provide a reasonable assessment that they could repay it,” he said. “I thought those rules were important. They are not the be-all, end-all because states can do more.”

California legislators last year considered but failed to approve several measures, including bills that would have capped interest rates on larger loans, limited the number of payday loans a single borrower could take out at once and required lead generators to be licensed as loan brokers.