Online lenders who charge borrowers stratospheric interest rates are
coming under pressure from state regulators — and it’s about time. But
to get at the root of the problem, the regulators may need to dig much
deeper.
For example, the New York attorney general followed other states’
regulators in suing Western Sky Financial and its affiliate Cash Call
Inc. The lawsuit contended that
rates charged to borrowers by the companies — from 89 to 343 percent,
depending on loan size — far exceed the caps determined by the state’s
civil and criminal usury laws. A borrower receiving $1,000 could wind up
owing almost $5,000 in finance charges, fees and principal over two
years, the complaint said.
Last Tuesday, Western Sky suspended operations, saying it was a victim of regulatory overreach, though its affiliate, Cash Call, was still functioning. Katya Jestin, a lawyer at Jenner & Block who represents the companies, said that because Western Sky operated on the Cheyenne River Indian Reservation in Eagle Butte, S.D., New York officials had no jurisdiction over it.
“We will be moving to dismiss the suit against Cash Call and the other parties,” Ms. Jestin said in an interview on Thursday. “Consumers voluntarily entered into the loans and agreed when they signed the loan agreements to be bound by the laws and the courts of the Cheyenne River tribe. The A.G.’s lawsuit is an attempt to sidestep these agreements and is an infringement on the tribe’s inherent sovereign rights and the rights of its members.”
It is unclear what more might happen with the New York attorney general’s case. But here’s a suggestion: When prosecutors pursue payday lenders, why not go further? Investigators should track down — and disclose — the institutions and individuals who make these operations possible by providing the capital that such companies need to conduct their business.
The capital needs of companies like Western Sky are crucial because, unlike banks, they don’t take in deposits that they can turn around and lend. They have to rely on financing from other sources. According to the attorney general’s complaint, Western Sky makes loans for which Cash Call, based in Anaheim, Calif., provides funding. Cash Call also acts as the servicer on Western Sky’s loans, collecting interest and principal payments from borrowers.
The question that the complaint doesn’t answer is this: Who is willing to provide the capital that enables Cash Call to finance what regulators say are predatory loans?
When asked if the office was investigating who was financing the company, Damien LaVera, a spokesman for the New York attorney general, declined to comment. He said the investigation was continuing. I’ve found a preliminary answer. Documents from a 2007 lawsuit show who was providing financing assistance to Cash Call in previous years. The institutions included Deutsche Bank Securities and a unit of Citigroup, known as the CIGPF 1 Corporation.
That lawsuit was brought by Cash Call against CIGPF in Federal District Court in New York. It related to a dispute over the bank’s financing arrangement with Cash Call. The suit was subsequently dismissed, but the court documents remain — and they provide a glimpse of the relationships between Cash Call and its bankers, Deutsche Bank and Citigroup.
Cash Call, the lawsuit said, obtained financing for its lending business from two credit facilities. The so-called senior facility, totaling as much as $1 billion, provided capital for about 90 percent of Cash Call’s consumer loans, the lawsuit said; a junior facility covered the rest.
Deutsche Bank Securities led the senior facility, or line of credit, which was backed by a variety of lenders, including CIGPF. The lawsuit said that this Citigroup unit had $20 million invested in this lending facility.
The smaller line of credit also involved both Deutsche Bank and the Citigroup unit. According to the suit, CIGPF invested $30 million in this facility.
Under these credit agreements, money repaid to Cash Call by its consumer borrowers first went to Deutsche Bank, which deducted “its interest and other earned fees.” It is unclear what Deutsche Bank earned from this arrangement.
After the bank deducted what it was owed, the lawsuit said, the remaining money was divvied up among other investors in the credit facility, including CIGPF.
I asked representatives of Citigroup and Deutsche Bank why the banks would want to provide backing for companies making high-cost and possibly predatory loans. Renee Calabro at Deutsche Bank said only that the bank ended the relationship with Cash Call in 2007. That was before the Cash Call unit began operating on the Indian Reservation.
Danielle Romero-Apsilos, a Citibank spokeswoman, said the bank no longer lent to Cash Call. She declined to say why Citibank did business with the lender, noting that the bank does not comment on clients.
Adam J. Levitin, a professor of law at the Georgetown University Law School, said the fact that banks like Deutsche and Citi did any business with Cash Call highlights the problem of large financial institutions enabling questionable practices by smaller outfits.
“It looks as if the New York banks were using online payday lenders to circumvent New York’s usury laws,” Mr. Levitin said in an interview last week. “The banks provide the financing for payday lenders to make loans the banks think are too unseemly or risky — or illegal — to make themselves.” The funding arrangements used by Western Sky and Cash Call are reminiscent of what occurred in the recent mortgage mania. The most egregious predatory lending wasn’t done, for the most part, by big national banks. It was done by smaller subprime mortgage companies like New Century, NovaStar and Fremont General, which made thousands upon thousands of loans.
But these companies wouldn’t have been able to make even 100 loans had they not gotten the money they needed from the big Wall Street banks. The warehouse lines of credit provided by those banks, therefore, enabled the underwriting of billions of dollars in dubious mortgages. Without access to that money, most of the worst loans would not have been written. When Wall Street cut off the credit spigot, these companies folded almost overnight.
Another Wall Street-as-enabler example involved Bear Stearns, which financed boiler-room stockbrokers such as A. R. Baron, Stratton Oakmont and Sterling Foster in the 1990s. A case brought against Bear Stearns by the Securities and Exchange Commission and the Manhattan district attorney in 1996 said the bank helped A. R. Baron commit securities fraud by providing financing. Bear Stearns, which collapsed in the mortgage meltdown, settled the A. R. Baron suit without admitting or denying the accusations. It paid $38.5 million in fines and restitution.
Regulatory cases that crack down on questionable lenders are surely welcome. But dubious actors can’t operate without the help of their financiers. Investigators should follow the money.
Src : http://www.nytimes.com/2013/09/08/business/find-the-loan-behind-the-loans.html?pagewanted=1&_r=1&ref=business
Last Tuesday, Western Sky suspended operations, saying it was a victim of regulatory overreach, though its affiliate, Cash Call, was still functioning. Katya Jestin, a lawyer at Jenner & Block who represents the companies, said that because Western Sky operated on the Cheyenne River Indian Reservation in Eagle Butte, S.D., New York officials had no jurisdiction over it.
“We will be moving to dismiss the suit against Cash Call and the other parties,” Ms. Jestin said in an interview on Thursday. “Consumers voluntarily entered into the loans and agreed when they signed the loan agreements to be bound by the laws and the courts of the Cheyenne River tribe. The A.G.’s lawsuit is an attempt to sidestep these agreements and is an infringement on the tribe’s inherent sovereign rights and the rights of its members.”
It is unclear what more might happen with the New York attorney general’s case. But here’s a suggestion: When prosecutors pursue payday lenders, why not go further? Investigators should track down — and disclose — the institutions and individuals who make these operations possible by providing the capital that such companies need to conduct their business.
The capital needs of companies like Western Sky are crucial because, unlike banks, they don’t take in deposits that they can turn around and lend. They have to rely on financing from other sources. According to the attorney general’s complaint, Western Sky makes loans for which Cash Call, based in Anaheim, Calif., provides funding. Cash Call also acts as the servicer on Western Sky’s loans, collecting interest and principal payments from borrowers.
The question that the complaint doesn’t answer is this: Who is willing to provide the capital that enables Cash Call to finance what regulators say are predatory loans?
When asked if the office was investigating who was financing the company, Damien LaVera, a spokesman for the New York attorney general, declined to comment. He said the investigation was continuing. I’ve found a preliminary answer. Documents from a 2007 lawsuit show who was providing financing assistance to Cash Call in previous years. The institutions included Deutsche Bank Securities and a unit of Citigroup, known as the CIGPF 1 Corporation.
That lawsuit was brought by Cash Call against CIGPF in Federal District Court in New York. It related to a dispute over the bank’s financing arrangement with Cash Call. The suit was subsequently dismissed, but the court documents remain — and they provide a glimpse of the relationships between Cash Call and its bankers, Deutsche Bank and Citigroup.
Cash Call, the lawsuit said, obtained financing for its lending business from two credit facilities. The so-called senior facility, totaling as much as $1 billion, provided capital for about 90 percent of Cash Call’s consumer loans, the lawsuit said; a junior facility covered the rest.
Deutsche Bank Securities led the senior facility, or line of credit, which was backed by a variety of lenders, including CIGPF. The lawsuit said that this Citigroup unit had $20 million invested in this lending facility.
The smaller line of credit also involved both Deutsche Bank and the Citigroup unit. According to the suit, CIGPF invested $30 million in this facility.
Under these credit agreements, money repaid to Cash Call by its consumer borrowers first went to Deutsche Bank, which deducted “its interest and other earned fees.” It is unclear what Deutsche Bank earned from this arrangement.
After the bank deducted what it was owed, the lawsuit said, the remaining money was divvied up among other investors in the credit facility, including CIGPF.
I asked representatives of Citigroup and Deutsche Bank why the banks would want to provide backing for companies making high-cost and possibly predatory loans. Renee Calabro at Deutsche Bank said only that the bank ended the relationship with Cash Call in 2007. That was before the Cash Call unit began operating on the Indian Reservation.
Danielle Romero-Apsilos, a Citibank spokeswoman, said the bank no longer lent to Cash Call. She declined to say why Citibank did business with the lender, noting that the bank does not comment on clients.
Adam J. Levitin, a professor of law at the Georgetown University Law School, said the fact that banks like Deutsche and Citi did any business with Cash Call highlights the problem of large financial institutions enabling questionable practices by smaller outfits.
“It looks as if the New York banks were using online payday lenders to circumvent New York’s usury laws,” Mr. Levitin said in an interview last week. “The banks provide the financing for payday lenders to make loans the banks think are too unseemly or risky — or illegal — to make themselves.” The funding arrangements used by Western Sky and Cash Call are reminiscent of what occurred in the recent mortgage mania. The most egregious predatory lending wasn’t done, for the most part, by big national banks. It was done by smaller subprime mortgage companies like New Century, NovaStar and Fremont General, which made thousands upon thousands of loans.
But these companies wouldn’t have been able to make even 100 loans had they not gotten the money they needed from the big Wall Street banks. The warehouse lines of credit provided by those banks, therefore, enabled the underwriting of billions of dollars in dubious mortgages. Without access to that money, most of the worst loans would not have been written. When Wall Street cut off the credit spigot, these companies folded almost overnight.
Another Wall Street-as-enabler example involved Bear Stearns, which financed boiler-room stockbrokers such as A. R. Baron, Stratton Oakmont and Sterling Foster in the 1990s. A case brought against Bear Stearns by the Securities and Exchange Commission and the Manhattan district attorney in 1996 said the bank helped A. R. Baron commit securities fraud by providing financing. Bear Stearns, which collapsed in the mortgage meltdown, settled the A. R. Baron suit without admitting or denying the accusations. It paid $38.5 million in fines and restitution.
Regulatory cases that crack down on questionable lenders are surely welcome. But dubious actors can’t operate without the help of their financiers. Investigators should follow the money.
Src : http://www.nytimes.com/2013/09/08/business/find-the-loan-behind-the-loans.html?pagewanted=1&_r=1&ref=business
