Why it matters
A pair of online payday lenders will pay the Federal Trade Commission (FTC) $4.4 million to settle charges that they tricked consumers by failing to disclose inflated fees in what the agency said was its largest recovery to date in a payday lending case. Red Cedar Services Inc. and SFS Inc. have each paid $2.2 million and collectively waived $68 million in fees to consumers that were not collected, the Commission said. In combination with collection from other defendants in the case, the FTC said it has recovered roughly $25.5 million, with an estimated $353 million in waived debt. The agency charged that the defendants violated the Federal Trade Commission Act by misrepresenting how much loans would cost consumers, promising that a $300 loan would cost $390 to repay and then actually charging consumers $975, for example. Red Cedar and SFS also ran afoul of the Truth in Lending Act and the Electronic Funds Transfer Act, the FTC added. Pursuant to the settlement agreement, the defendants are prohibited from misrepresenting the terms of any loan product going forward, in addition to the monetary recovery.
Detailed discussion
A case against multiple defendants engaged in online payday lending has provided the FTC with a record yield. According to the agency, the Commission has recovered about $25.5 million in connection with the case, which has also resulted in an estimated $353 million in waived debt, "making this already the largest FTC recovery in a payday lending case, with litigation still continuing against other defendants."
"Payday lenders need to be honest about the terms of the loans they offer," Jessica Rich, Director of the FTC's Bureau of Consumer Protection, said in a statement. "These lenders charged borrowers more than they said they would. As a result of the FTC's case, they are paying a steep price for their deception."
In the most recent development in the case, the Commission reached a deal with Red Cedar Services Inc. and SFS Inc., entities chartered under the Modoc Tribe of Oklahoma and Santee Sioux Nation of Nebraska, respectively. Both entities illegally charged consumers undisclosed and inflated fees in violation of Section 5 of the Federal Trade Commission Act, the agency alleged, as well as failed to accurately disclose key loan terms mandated by the Truth in Lending Act (TILA), such as the annual percentage rate. Preauthorized debits from consumers' bank accounts were a condition of the loans, the FTC said, in violation of the Electronic Funds Transfer Act (EFTA).
One contract cited by the Commission informed borrowers that a $300 loan would cost them $390 to repay. But the actual cost of the loan from Red Cedar was $975, the FTC said, because the defendants typically withdrew partial payments on multiple days, assessing a finance charge each time.
The defendants initially argued that they were immune from the FTC's oversight because of their tribal affiliations. But in March 2014 a federal court judge in Nevada ruled that the agency had the authority to bring suit against payday lenders affiliated with American Indian tribes, a decision hailed by the FTC as "a strong signal to deceptive payday lenders that their days of hiding behind a tribal affiliation are over."
Soon after, the defendants began to reach deals with the agency.
To settle the charges, Red Cedar and SFS agreed to pay the Commission $2.2 million each and waive borrower fees totaling around $68 million. In addition, the defendants are now prohibited from misrepresenting the terms of any loan product, including the payment schedule and interest rate, the total amount the consumer will owe, annual percentage rates or finance charges, and any other material facts. Future violations of TILA and EFTA are also banned.
To read the stipulated final orders with Red Cedar and SFS in FTC v. AMG Services, click here.
