An Overland Park-based online payday lending operation accused of deceiving borrowers by charging inflated fees has agreed to pay federal regulators $21 million, the largest such settlement ever.
Most of the record payout will be returned to borrowers as refunds. AMG Services Inc. of Overland Park and its partner company, MNE Services of Miami, Okla., also will forgive $285 million in unpaid fines and loans still owed by customers, according to the settlement announced Friday by the Federal Trade Commission.
“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 prepared statement.
“It should be self-evident,” Rich said, “that payday lenders may not describe their loans as having a certain cost and then turn around and charge consumers substantially more.”
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Unexpected fees and higher-than-advertised interest rates often left customers with debts that more than tripled the amounts they had originally borrowed, the FTC alleged in court documents.
The settlement includes no admission of guilt by the companies. Efforts to reach a company attorney late Friday were unsuccessful.
In legal filings, AMG had argued that its affiliation with American Indian tribes should make the company immune to legal action.
It said the tribes’ sovereign status meant they weren’t subject to state or federal laws. A federal magistrate judge disagreed, ruling in 2013 that the lenders had to obey federal consumer protection statutes, even if they were affiliated with tribes. A U.S. District Court judge upheld that ruling last year.
AMG claimed to be owned by the Miami and Modoc tribes of Oklahoma and the Santee Sioux of Nebraska. But the tribes reportedly received only 1 to 2 percent of the revenue from each loan.
The real beneficiary allegedly was race car driver Scott Tucker, who used $40 million collected from borrowers to sponsor his racing team, according to a 2012 complaint filed by the FTC. Tucker has not settled the FTC charges against him. His case is pending before a federal judge in Nevada.
Lawyers for Tucker have previously said the business practices of the tribes were “fully compliant with federal law” and they would contest the allegations.
A growing number of payday lenders have migrated from storefronts to the Internet in recent years in a bid to sidestep state laws designed to curb predatory loans. Some companies exploit ties with tribes to avoid federal regulation, consumer advocates say.
Friday’s record payday loan settlement is significant because it shows that tribal immunity is not working as a business model for payday lenders, said Ed Mierzwinski, consumer program director of the consumer advocacy group U.S. PIRG.
“Online payday lenders have tremendous power to reach into consumer bank accounts illegally and take excess fees,” Mierzwinski said. “Fortunately, FTC and the courts rejected this one’s claims of tribal immunity from the law.”
Law enforcement officials across the country have received more than 7,500 consumer complaints about the firms in Friday’s settlement, according to the FTC.
The FTC said the two companies are both part of the same lending operation. The agency said AMG serviced cash advance payday loans offered by MNE on websites using the trade names Ameriloan, United Cash Loans, US Fast Cash, Advantage Cash Services, and Star Cash Processing.
The websites advertised a one-time finance fee and promised that customers could get loans “even with bad credit, slow credit or no credit.”
But the FTC says borrowers were misled about the real annual percentage rate of the loans and didn’t realize they would be charged additional finance fees every time the companies made withdrawals from their bank accounts.
Contracts with borrowers indicated that a $300 loan would cost $390 to repay, for example, when it really cost $975, according to the FTC.
The agency also alleges that the companies illegally made pre-authorized withdrawals from customers’ bank accounts as a condition of credit.
The Community Financial Services Association of America, a trade group for the payday lending industry, issued a statement Friday that distanced the group from the two companies involved in the settlement and expressed support for the FTC’s actions.
“These unscrupulous practices are not representative of the entire payday lending industry nor the online sector of it, and they harm the reputations of (association) members who uphold the highest lending standards in the industry,” the statement said. “More importantly, these bad actors create an even more confusing environment for consumers, making them more susceptible to fraud and abuse.”
AMG previously had reached a partial settlement with the FTC in 2013 over allegations that the company had illegally threatened borrowers with arrest and lawsuits. That settlement prohibited AMG from using such tactics to collect debts.