By Nicole D. Prysby, J.D.
An ALJ recommended that a lender and its CEO pay restitution of $38 million and $12.5 million in civil penalties, affirming CFPB allegations that they deceived consumers about the costs of short-term loans.
An administrative law judge (ALJ) recommended that restitution of $38 million be paid by an online lender and its CEO for violations of the Truth in Lending Act (TILA), Electronic Fund Transfer Act (EFTA), and Consumer Financial Protection Act (CFPA). The recommended decision by Judge Christine Kirby affirmed the Consumer Financial Protection Bureau’s allegations that Integrity Advance, LLC, and its CEO, James R. Carnes, deceived consumers about the cost of short-term loans. The ALJ recommended that Integrity be held liable for restitution in the total amount of $132 million and, as a subset of that amount, both Integrity and Carnes be held jointly and severally liable for restitution in the amount of $38 million. The ALJ also recommended injunctive relief and a civil money penalty in the amount of $7.5 million against Integrity and $5 million against Carnes (In the Matter of Integrity Advance, LLC. Aug. 4, 2020, Kirby, C.).
The Bureau filed an administrative suit against Integrity and Carnes for allegedly deceiving consumers about the cost of short-term loans. In 2016, an ALJ affirmed the Bureau’s allegations. The defendants appealed, but the appeal was placed in abeyance and was remanded in 2019 to a new ALJ (see Banking and Finance Law Daily, June 4, 2019). The ALJ’s recommended decision found Integrity liable for violations of the TILA, EFTA, and CFPA (due to violation of the TILA and EFTA, for deception regarding TILA disclosures, and for unfairness regarding TILA disclosures and remotely created checks) and found Carnes individually liable as well.
Specifically, the ALJ concluded that the consumer’s legal obligation was not clearly and conspicuously disclosed at the time of signing Integrity’s loan agreement. If a consumer did not pay the loan in full on the payment date, it would automatically renew and the consumer’s bank account would be debited for a finance charge, plus accrued fees. After four auto-renewals, the loan would automatically be placed into an "auto-workout" payment plan. Essentially, Integrity disclosed multi-payment loans as if they were single payment loans and, in doing so, failed to clearly and conspicuously disclose consumers’ legal obligations, in violation of the TILA.
TILA, CFPA. The court also found that Integrity and Carnes engaged in deceptive practices by providing consumers with TILA disclosures that were false and misleading in violation of the CFPA. The TILA disclosures were material and were likely to mislead consumers. The visual message created by the placement, language, and prominence of the TILA boxes, the summary of the payment schedule, and the itemization of the amount financed, as compared to the fine print, contributed to the net impression that the Loan Agreement was for a single-payment loan that would cost only the "Total of Payments." The "special notice," stating that the loan is designed as a short-term cash flow solution and not for longer term financial problems or to meet long-term needs, did not clarify the true costs of the loans.
Integrity and Carnes engaged in unfair practices regarding the TILA disclosures by supplying consumers with deceptive loan cost disclosures that misled them about their repayment obligations. Consumers could not have bargained for loan terms that were not disclosed and thus by their very nature were deceptive. Because the actual loan costs were not clearly and conspicuously disclosed, injury to consumers was not "reasonably avoidable." The harm to consumers was not outweighed by a countervailing benefit to consumers or competition, because the benefit of the loans could have been provided to consumers while accurately disclosing the costs.
EFTA, CFPA. Integrity’s use of ACH authorizations violated the EFTA. The repayments authorized by Integrity’s ACH form are "preauthorized electronic fund transfers" as defined by EFTA and Regulation E. The loan documents did not contain an indication that consumers could obtain a loan from the company without completing and agreeing to the ACH authorization. Although a small percentage of consumers obtained loans without signing the ACH authorization, that is not evidence that consumers were not required to sign the ACH authorization in the normal course of business. And the practice of obtaining authorization for demand drafts (remotely created checks or RCCs) in a confusing manner, and then initiating such RCCs, constituted an unfair practice under the CFPA. The use (more than 600 times) of RCCs to withdraw funds from the accounts of consumers who had attempted to stop ACH withdrawals from their bank accounts caused substantial injury. The harm was not reasonably avoidable. and was not outweighed by countervailing benefit to consumers or competition.
Individual liability. The ALJ concluded that Carnes should be held individually liable. He did not personally draft the loan agreements, but understood the loan disclosures, auto-renewal, and auto-workout process. He knew the information in the TILA boxes would be disclosed as if the loan were a single-payment "payment-in-full" loan and he knew and understood the default auto-renewal and auto-workout processes which the vast majority of the loans experienced. Finally, he was aware that RCCs were being used in circumstances when consumers had revoked their ACH authorization and tried to prevent Integrity from debiting their bank accounts.
Damages, relief. With respect to damages, the ALJ recommended that Integrity be held liable for restitution in the total amount of $132 million and, as a subset of that amount, both Integrity and Carnes be held jointly and severally liable for restitution in the amount of $38 million. The ALJ also recommended injunctive relief and a civil money penalty in the amount of $7.5 million against Integrity and $5 million against Carnes.
The administrative action is No. 2015-CFPB-0029.
Attorneys: Benjamin J. Clark, Stephen C. Jacques, Thomas Ward, Deborah Morris, and Alusheyi J. Wheeler for the Consumer Financial Protection Bureau. Richard J. Zack, Michael A. Schwartz, Christen M. Tuttle, and Saverio S. Romeo (Troutman Pepper Hamilton Sanders LLP) for Integrity Advance, LLC and James Carnes.
Companies: Integrity Advance, LLC
MainStory: TopStory CFPB ChecksElectronicTransfers EnforcementActions Loans TruthInLending UDAAP
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