As the Consumer Financial Protection Bureau retreats, states continue their aggressive attacks on short-term lending. In California, efforts to avoid interest rate limits cost a payday lender $160,000, while the Virginia AG went to battle against a lender who allegedly disguised loans as “sales.”

What happened

During a 2015 examination of the California subsidiary of a South Carolina-based payday lender, the DBO found multiple violations of the California Finance Law, the regulator said.

The CFL caps interest rates on loans of under $2,500. To avoid this limitation, the lender added registration fees payable to the state Department of Motor Vehicles to the principal amount of its loans, pushing it over the limit so that the lender could increase its interest rates. The DBO determined that the bona fide principal amount of the loans was less than $2,500 because the lender should have excluded the DMV fees.

In addition, the lender paid unlicensed lead generators for referrals of some of its CFL borrowers in violation of state law, the DBO alleged.

While the lender disagreed with the DBO’s conclusions, it agreed to a settlement to avoid a hearing or other litigation. Pursuant to the Consent Order, the lender will pay an administrative penalty of $77,859. Further payment of $82,140.91 in the form of refunds on 519 loans has already been made.

Proactively, the lender promised to ensure that any loans made under its CFL licenses will comply with state law.

The action was part of a broader crackdown by the DBO on lender avoidance of interest rate limits on small-dollar consumer loans, the regulator said. In a prior action, a lender that allegedly deceived consumers into taking out loans greater than $2,500—by telling borrowers state law prohibited loans under that amount—paid roughly $140,000 in refunds and investigation costs. Another lender steered customers into loans above $2,500 for the express “purpose of evading” the interest rate caps, the DBO asserted in a separate case, reaching a $68,000 deal.

Meanwhile, the Virginia Attorney General filed a lawsuit alleging that defendants made illegal loans with annual interest rates as high as 183 percent. The twist: The defendants allegedly disguised their loans as “sales” and not loans.

Specifically targeting elderly consumers and veterans with military or government pensions, the defendants allegedly misrepresented that they were “buying” portions of the monthly pension payments, using terms such as “purchase and sale agreement,” “buyer,” and “purchase price” to conceal their true intent to make loans and to dodge the state’s interest caps.

The defendants allegedly advertised to and solicited consumers in Virginia between June 2011 and June 2017, via telephone, email and websites, promoting their product as a way for pensioners to obtain cash to meet their immediate needs or long-terms goals, characterizing the transaction as a “lump sum” sale or “pension buyout.”

Although the defendants allegedly changed the terminology in the agreements to use words such as “seller” and “buy,” all 950 agreements made with at least 650 Virginia residents still met the definition of a “loan” under state law as the “delivery by one party to and receipt by another party of a sum of money upon agreement, express or implied, to repay it with or without interest,” the AG asserts.

In one example, a disabled military pensioner allegedly executed a “Future Income Payment Purchase and Sale Agreement” for the sum of $5,500 that required him to repay the defendants $35,420 (plus a $300 “Set-up fee”) in interest over the course of five years—which equates to an approximate annual percentage rate of 137 percent (far in excess of the state’s 12 percent general usury cap).

To help with its ruse, the defendants would allegedly ascertain the amount of the pensioners’ monthly payment and then offer a loan, the repayment of which would be based upon a monthly payment of principal and interest equal to the monthly pension payment. The complaint further alleges that defendants also included a provision in the agreement that misrepresented the existence of tax liability for the “sale” of pension payments, despite the fact that consumers incurred no liability because the transaction was a loan.

For the allegedly willful violations of the Virginia Consumer Protection Act, the AG requested a preliminary and permanent injunction against violations of the statute, refunds for consumers, and civil penalties and costs for the government.

Why it matters

The CFPB stand-down on short-term lending provides little respite for short-term lenders, as the states ramp up pressure on the fringes of this activity. The DBO and other state regulators continue to be active: “California consumers deserve a zero-tolerance policy when it comes to lender practices that cause borrowers to pay higher interest rates than they should under state law,” DBO Commissioner Jan Lynn Owen said. “We will remain aggressive in finding and penalizing such conduct, and making consumers whole.” The Virginia complaint—which requested both injunctive and monetary relief and referenced “a line of private and public actions” against the defendants from a class action in California to lawsuits filed by Massachusetts and Minnesota regulators—challenged the defendants’ characterization of its actions as “sales” rather than loans. “By disguising their loans as sales, these companies tried to get around important laws that protect seniors and retirees on fixed-incomes from financial exploitation,” AG Mark R. Herring said in a statement.

To read the DBO Consent Order, click here.

To read the Virginia AG’s Complaint, click here.