Unlawful Lending Schemes by Check ‘n Go, Money Mart Target Low-Income Borrowers With Interest Exceeding 400 Percent APR
SAN FRANCISCO (April 26, 2007) — City Attorney Dennis Herrera today filed suit against storefront lending institutions Check ‘n Go and Money Mart, together with their online affiliates and an associated out-of-state bank, for unlawful, unfair and fraudulent business practices stemming from their marketing of short-term installment loans at unlawful interest rates to low-income borrowers. In addition to Check ‘n Go, Money Mart and its affiliates, the lawsuit names Wilmington, Del.-based First Bank of Delaware (OTC:FBOD) as a defendant for aiding and abetting the storefront institutions’ illicit lending schemes.
Check ‘n Go and Money Mart are licensed deferred deposit lenders, offering “payday loans” in which a borrower gives the lender a post-dated check in exchange for cash. Payday loans are most often sought by low-income and working class families living paycheck to paycheck. In addition to these payday loans, however, Check ‘n Go illegally offers short-term installment loans for principal amounts of up to $1,500 — with annual percentage rates exceeding 400 percent — through questionable arrangements with online affiliates and First Bank of Delaware, which Herrera charges are deliberate efforts to circumvent state law. According to the complaint, Money Mart marketed the identical loan offering in association with First Bank of Delaware until earlier this month, when the company quietly ended the illegal practice in its storefront locations. Money Mart’s current marketing materials, however, confirm that the company is planning to launch an Internet version of the same product later this month, according to the City’s complaint.
Neither Check ‘n Go nor Money Mart is licensed to provide such short-term loans in California, and each is legally prohibited from offering installment loans in the same place of business as payday loans. Herrera’s litigation alleges that the businesses’ bait-and-switch marketing practices of advertising “more flexible” installment loans, whereby “bigger is better,” run afoul of state legal prohibitions on false, misleading, or deceptive advertising. The further suit alleges that these “installment” loans are in reality disguised payday loans, because they give the lenders access to borrowers’ checking account funds for repayment. By pushing these larger, higher interest loans on customers who seek payday loans, Herrera charges that Check ‘n Go and Money Mart are attempting to circumvent the limits imposed by state law on the size, duration, and fees that California law permits lenders to offer for payday loans.
“Check ‘n Go and Money Mart have targeted working families with an illicit lending scheme that would make a loan shark blush,” Herrera said. “With annual interest rates exceeding 400 percent, these business practices are not merely unconscionable, they’re illegal — and we intend to put an end to them in California. I thank the California Reinvestment Coalition and the Center for Responsible Lending for their work on these issues. I am also grateful to the participants in our affirmative litigation working group from Yale Law School, who worked hard to help advance this important consumer protection action. This is the first of what I hope will be many more worthy collaborations.”
“We have always asserted that charging consumers 459 percent APR interest rate for a small-dollar loan is usury,” said Charisse Ma Lebron, the California Reinvestment Coalition’s Payday Campaign Organizer. “CRC commends City Attorney Herrera for protecting consumers, which is unfortunately what the state legislature has failed to do for all Californians. We visited 253 payday lenders across the state and found widespread noncompliance even with the most basic requirement, such as posting a full Schedule of Fees so that consumers know what they are paying. The San Francisco City Attorney’s litigation against fringe financial services companies sets the necessary and important precedent of broadening and ensuring consumer protections. Ultimately, our Payday Lending Campaign’s goal is to implement robust and comprehensive consumer rights and protections for all Californians against predatory payday loans.”
According to the civil action filed in San Francisco Superior Court this morning, the illicit loan offerings by Check ‘n Go and Money Mart violate both the California Finance Lenders Law, which governs short-term consumer loans, and the California Deferred Deposit Transaction Law, which regulates deferred deposit or “payday loans.” By violating these provisions of the state Financial Code, the lenders have lost exemptions to constitutional usury prohibitions that the law would typically extend. As a result, Herrera’s lawsuit alleges, Check ‘n Go, Money Mart and their affiliates are additionally in violation of the California Constitution’s usury law, which prohibits personal loans whose annual interest rate exceeds ten percent.
Check ‘n Go is controlled by Mason, Ohio-based corporations Check ‘n Go California, Inc. and Southwestern & Pacific Specialty Finance, Inc. According to the company’s Web site, Check ‘n Go operates three locations in San Francisco. Money Mart, whose Web site claims twelve locations in San Francisco, is operated by the Berwyn, Pa.-based Monetary Management of California, Inc. According to records of the California Department of Corporations, Money Mart has more than 100 locations in California, while Check ‘n Go has nearly 200 California stores.
Bank on San Francisco
Acknowledging that payday lending can offer individuals living paycheck to paycheck the critical access to credit that they need to meet unexpected financial burdens, Herrera noted that this access to credit should be offered in compliance with California’s consumer protection laws.
Herrera’s suit complements the “Bank on San Francisco” program, which was instituted last year by City Treasurer José Cisneros, in a joint effort with Mayor Gavin Newsom and the Federal Reserve Bank of San Francisco, to assist the City’s estimated 50,000 un-banked households. The goal of the program is to bring 10,000 of the estimated 50,000 un-banked households in San Francisco into the financial mainstream by helping them to open a low-cost, starter bank account. Additional information on Bank on San Francisco is available online at http://www.sfgov.org/bankonsf or by calling 2-1-1.
Treasurer Cisneros said, “I want to make it clear to every resident of San Francisco that there is an alternative to costly check cashers and payday lenders: Bank on San Francisco. We have fifteen major banks and credit unions participating in our Bank on San Francisco program-which means over 150 branch locations offering low or no cost accounts, accepting alternative forms of identification like the Mexican Matricula card, and giving those who have had financial trouble in the past a second chance at a bank account. Please visit one of these locations and ask how to open a Bank on San Francisco account.”