Payday loan business’ alleged deception should bring $132 million restitution, agency says

The Consumer Financial Protection Bureau building in Washington, D.C.
The Consumer Financial Protection Bureau building in Washington, D.C. The National Law Journal

The Consumer Financial Protection Bureau has asked a federal judge to order $132.6 million in restitution against a payday loan company once run by James Carnes, a Mission Hills businessman.

The agency also seeks $11.7 million in civil penalties from Integrity Advance LLC and a $7.8 million in civil penalties from Carnes.

Attorneys for Carnes and his company, Integrity Advance LLC, have responded in court filings that they should owe nothing. Carnes could not be reached for comment.

In November, the Consumer Financial Protection Bureau accused Carnes and Integrity Advance of running a consumer loan business that deceived customers about the true costs of their loans.

The bureau alleges that Integrity Advance presented consumers with loan terms that misrepresented the true cost of repaying what they borrowed. The bureau argued that the loan terms were ambiguous as to whether consumers were supposed to repay the loans in full on their next payday, or renew the loan and make multiple payments with additional finance charges.

The agency also claims the company drew money out of customers’ bank accounts through what’s known as “remotely created checks” after customers instructed their banks to halt automatic debits by Integrity Advance.

The $132.6 million in restitution represents what the Consumer Financial Protection Bureau believes Integrity Advance’s customers overpaid on their loans.

Attorneys for Carnes and Integrity Advance say that the bureau has not proved that consumers suffered any harm and that using remotely created checks is not illegal. They also say that call center personnel clearly explained the terms and costs of the loans to consumers.

The attorneys add that the bureau improperly calculated the restitution amounts it says the company and Carnes should pay.

Federal administrative law judge Parlen McKenna ruled in July that Integrity Advance’s loan terms were misleading. That led to a trial later in July to explore whether Carnes was subject to individual liability, whether the remotely created checks were unfair and whether Carnes or Integrity Advance should pay restitution or penalties.

The bureau’s restitution request appears in an Aug. 29 posttrial brief, filed on the same day that Carnes and Integrity Advance argued that the agency hasn’t met its burden of proof to receive restitution or penalties. No other filings have since been made, according to a CFPB docket.

McKenna will rule on the matter by Sept. 27. He could award the bureau’s full request, nothing at all, or something in between.

Attorneys representing Carnes argued to the judge that he has no individual liability in the case.

They say the bureau could not prove Carnes’ involvement in drafting the allegedly deceptive loan terms, nor did he adopt policies for using remotely created checks. Carnes’ legal team presents him as an executive who focused on business relationships and obtaining new customers, and less so on the terms of a loan agreement that private attorneys drafted for the company.

They add that banking regulators in Delaware, where Integrity Advance was incorporated, looked at the company’s loan agreements before it was allowed to obtain a license.

“He has maintained from the start that he was not aware of, or personally responsible for, any of the conduct claimed by the CFPB,” said Allyson Baker, an attorney with Washington D.C. law firm Venable who is representing Carnes and Integrity Advance.

“He is grateful for the opportunity to have presented substantial evidence in his defense to an administrative judge this summer. He awaits the Judge's decision in the coming weeks.”

The Consumer Financial Protection Bureau counters that Carnes had intimate knowledge of, and authority over the business. He served as top executive not only for Integrity Advance, but also for the lender’s owner, Hayfield Investment Partners. The bureau claimed that Integrity Advance accounted for 75 percent of the parent company’s revenue.

Remotely created checks, also known as demand drafts, are checks created not by the bank or an accountholder, but by someone looking for payment. Remotely created checks are not illegal, but the FTC has banned their use in telemarketing.

The Consumer Financial Protection Bureau used an example of an unnamed consumer who borrowed $500 from Integrity Advance. The company, according to the bureau, withdrew $950 from the consumer by way of automatic debits from their checking account. When the consumer told the bank to stop honoring the automatic debits, Integrity Advance withdrew another $520 by way of remotely created checks, the bureau said in a court filing.

Integrity Advance’s attorneys say the bureau couldn’t prove at trial that the company used remotely created checks to the detriment of any consumers. In fact, a witness for the bureau testified that it was possible that consumers halted automatic debits on their accounts because they wanted to renege on their obligation to pay, according to Integrity Advance’s attorneys.

The company operated from 2008 to 2012. Carnes sold assets of the company to Dallas-based payday loan and pawn shop operator EZ Corp. for $50 million.

The Consumer Financial Protection Bureau case represents another major federal investigation into Kansas City area businesses associated with the payday loan industry.

Last year the Federal Trade Commission settled claims against Tim Coppinger and Frampton Rowland III, two Kansas City men accused of running a fradulent payday loan scheme. Both Coppinger and Rowland are subject to $32 million and $22 million in suspended judgements, respectively.

The FTC has also investigated area businessmen Scott Tucker and Richard Moseley Sr. for their involvement in allegedly illegal payday loan operations. Tucker and Moseley have been indicted separately on criminal charges associated with their businesses in New York. The FTC is seeking $1.32 billion from Tucker and his enterprises in a separate civil case against the professional race car driver.

Steve Vockrodt: 816-234-4277, @st_vockrodt