Why it matters

The first case brought by a state regulator under Section 1042 of the Dodd-Frank Wall Street Reform and Consumer Protection Act resulted in a consent judgment, with an auto lender agreeing to pay up to $12 million to New York’s Department of Financial Services (DFS). The federal statute grants states the power to bring civil actions in federal court for violations of Dodd-Frank’s consumer protection provisions. Superintendent of the DFS Benjamin Lawsky alleged that Condor Capital Corporation and its sole shareholder overcharged borrowers interest, failed to notify borrowers who made overpayments on their accounts and kept the money, and lacked appropriate data security measures. In addition to fines and penalties, the consent judgment requires that the defendants liquidate all remaining loans and surrender their licenses in all states. While a handful of other state attorneys general have similarly flexed their Dodd-Frank muscles in court (lawsuits have been filed by the Attorneys General in Connecticut, Florida, Illinois, and Mississippi), Superintendent Lawsky is the first state banking or other regulator to utilize this tool, and he encouraged other state regulators to take action. “This case demonstrates that the Dodd-Frank Act provides a powerful new tool for state regulators to pursue wrongdoing and obtain restitution for consumers who were abused,” he said in a statement about the case. “We hope other regulators across the country will consider taking similar actions when warranted.” State bank regulators and other licensing authorities have become increasingly active in enforcing consumer protection laws, and likely will consider using Section 1042 in the future.

Detailed discussion

According to the DFS, Long Island-based Condor Capital and sole shareholder Stephen Baron engaged in a host of illegal activity, including violations of state law, the Truth in Lending Act (TILA), and Dodd-Frank.

Specifically, Condor did not inform “thousands” of customers that they had overpaid on their accounts. Instead, the company kept the money and engaged in a policy of failing to refund a positive credit balance absent an express request by a customer.

Condor did not notify customers when a positive credit balance remained in their account at the end of a loan period. To help conceal the positive balance, the company programmed its system to terminate customer access to their account information once a loan was terminated – even if a positive balance remained. The defendants also reported to the New York State Comptroller that they had no unclaimed property despite the positive credit balances, the DFS said.

Violations of TILA occurred when Condor calculated the interest it charged customers based on a 360-day year, applying the daily interest rate to customers’ loan accounts each of the 365 days. As a result, customers’ annual percentage rate (APR) was in excess of the one-eighth of 1 percent permitted under the federal statute, the regulator said. Making matters worse, the defendants “on multiple occasions” attempted to add the one-eighth of 1 percent interest back to customers’ accounts even after being informed by regulators that the practice violated TILA.

As for its improper data security, the DFS said that Condor left “stacks” of hard copy customer loan files lying around the common area of its offices and failed to establish policies, procedures, and controls to protect its information technology systems, leaving customer information vulnerable.

To settle the charges, the defendants admitted to violating the state and federal laws at issue. Pursuant to the final consent judgment, they agreed to pay a $3 million fine to the regulator and provide borrowers nationwide with restitution plus 9 percent interest, estimated to be between $8 million and $9 million. If the Department determines that any customer suffered identity theft as a result of Condor’s mishandling their private information, the judgment also requires Baron to pay damages.

An appointed receiver will finish the process of liquidating Condor’s loan portfolio and paying customers restitution. The defendants will then surrender their licenses in all states.

To read the final consent judgment in Lawsky v. Condor Capital Corporation, click here and here.

To read the complaint regarding Section 1042, click here.