CashCall Inc., an internet lender accused of hiding behind a Native American tribe in violation of state law, agreed to pay nearly $ 12 million to settle charges filed by the Minnesota Attorney General .
The California-based company was also held from further business in the state, said Attorney General Lori Swanson on Thursday.
“The company has implemented an elaborate plan to collect payments that go well beyond state law,” said Swanson when announcing the settlement. CashCall is required to cancel all outstanding credits, repay consumers and “reverse any adverse reporting to the credit bureaus”.
CashCall founder and owner J. Paul Reddam and his attorney did not answer calls for comment. The company has made similar settlements in other states.
The comparison is one of the largest affecting the controversial payday loan industry in Minnesota. State leverage was strengthened by a 2015 Minnesota Supreme Court ruling that found that lenders outside of the state must comply with Minnesota’s online lending law.
In the settlement approved by Hennepin County’s District Judge Karen Janisch, CashCall Inc. is required to repay $ 4.5 million to consumers and cancel more than $ 5.2 million in outstanding balances on more than 2,200 loans. She must notify third parties who have purchased more than $ 1.9 million in outstanding loan balances that the debt on more than 1,100 loans will be canceled.
Swanson sued CashCall in 2013, accusing the company and its subsidiaries of running an “elaborate ruse” to deceive borrowers and regulators into illegally high interest rates on internet loans.
The lawsuit alleged that CashCall had fraudulently alleged that its loans were subject to tribal immunity because they were made by a South Dakota company called Western Sky Financial Inc. owned by an Indian tribal member. However, sovereign tribal immunity does not protect a single member.
The loans were quickly sold to CashCall and its subsidiaries.
The companies that advertised on radio and television in Minnesota issued loans ranging from $ 850 to $ 10,000 and charged annual percentages of up to 342 percent, according to the lawsuit. In Minnesota, a licensed lender providing a similar loan might charge an APR of about 22 percent.
The rent-a-tribe arrangement came about when tightened regulations hampered the business of providing expensive consumer credit over the Internet and lenders sought new ways to sell their goods.
Some online payday lenders had attempted to circumvent state credit and consumer protection laws by claiming that the loans were only subject to the laws of their home state or country. In 2013, the internet payday loan industry had an estimated loan size of $ 15.9 billion.
The supposed benefit of payday loans is that they allow borrowers to pay their basic living expenses before their next paycheck. However, many borrowers rely on the loans as the main source of long-term loans and fail to pay them back on time, creating additional fees. State law requires that payday lenders be licensed with the Minnesota Department of Commerce.
Mike Rothman, commissioner for the Minnesota Department of Commerce, said the agency, which failed to get legal approvals for stricter lending standards two years ago, will return to Minnesota law in 2017 to require a 36 percent cap on payday interest rates. In addition, the agency wants to limit the number of loans to save borrowers from the “debt trap” of interest and penalties.
Meanwhile, Sunrise Community Banks of St. Paul has won awards and laurels from consumer groups for an alternative product that provides unsecured emergency credit from employers that must be repaid within one year at a maximum effective rate of 25 percent. It also limits the size and number of loans. Sunrise developed its program with Lutheran Social Service, a major provider of financial advice to consumers struggling with payday loans.