Why it matters

Continuing the regulatory crackdown on payday lenders, the Federal Trade Commission (FTC) reached a proposed settlement with two lenders – AMG Services, Inc. and MNE Services, Inc. – for a $21 million payment and $285 million in waived charges. According to a complaint filed in Nevada federal court, the defendants violated the FTC Act, Truth in Lending Act (TILA), and the Electronic Funds Transfer Act (EFTA). To settle the suit, the defendants agreed to the payment and the waived charges, as well as a prohibition on future violations of TILA, EFTA, and the FTC Act by changing their practices. The deal – which the FTC said is the largest recovery in a payday lending case in the agency’s history – is the latest example of regulatory scrutiny of the payday lending industry, following other actions such as a $10 million settlement between a Texas-based lender and the Consumer Financial Protection Bureau last July and a consent agreement requiring a bank to pay $1.2 million to the Department of Justice for facilitating alledgedly fraudulent payday loan transactions.

Detailed discussion

The FTC filed suit against AMG Services, Inc. and MNE Services, Inc. and related entities in Nevada federal court charging the payday lending companies with violations of three federal laws.

According to the complaint, the defendants violated the FTC Act by misrepresenting how much a loan would actually cost. In one example, a contract stated that a $300 loan would cost a borrower $390 to repay. In reality, the defendants charged the borrower $975, the agency contended.

TILA requirements – such as accurately disclosing the annual percentage rate (APR) and other terms – were not followed by the defendants, the agency also alleged. In the example of the $300 loan, the defendants would typically withdraw partial payments on multiple days, assessing a finance charge each time, but nowhere was the APR, finance charge, total number of payments, or the payment schedule disclosed, the FTC alleged.

Finally, the FTC said the defendants made preauthorized debits from borrowers’ bank accounts a condition of the loans, which according to the FTC violated the EFTA.

“The settlement requires these companies to turn over millions of dollars that they took from financially-distressed consumers, and waive hundreds of millions in other charges,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection, said in a press release about the action. “It should be self-evident that payday lenders may not describe their loans as having a certain cost and then turn around and charge consumers substantially more.”

The settlement comes after a federal court judge agreed with the FTC that the agency had the authority to bring suit against the lenders, which are affiliated with American Indian tribes.

To settle the suit, without admitting fault, the defendants agreed to pay $21 million, the largest FTC recovery to date in a payday lending case. In addition, $285 million in charges the defendants had assessed but not collected will be waived pursuant to the proposed consent order.

Changes to the defendants’ business practices are also included in the settlement. Going forward, for example, they are prohibited from misrepresenting the terms of any loan product, including the payment schedule, the total amount owed by a borrower, the interest rate, the APR or finance charges, and any other material facts. Also banned are violations of TILA and the EFTA.

To read the complaint and the stipulated order in FTC v. AMG Services, click here.