A man alleged to be the owner and operator of a group of payday-lending companies and an attorney alleged to have submitted false affidavits and structured sham arrangements have been indicted by a federal grand jury in New York. In addition to charging the defendants with criminal violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) (and seeking $2 billion in restitution), the indictment charges them with criminal violations of the Truth in Lending Act (TILA).

According to the indictment, the companies violated the laws of various states by making Internet payday loans to consumers at interest rates in excess of 700 percent per annum, more than double the permitted rates, and, in certain of such states, failing to obtain required licenses. The indictment alleges that the defendants entered into sham business relationships with three Native American tribes to defeat lawsuits filed by numerous state regulators. These relationships were allegedly structured to create the false appearance that the loans were made by the tribally owned companies, and thereby allowed the defendants to avoid the application of state usury laws based on tribal sovereign immunity. While the indictment makes passing reference to a prior relationship with a Delaware bank, the charges are limited to the tribal programs.

The attorney defendant is alleged to have "served as the architect" of the tribal relationship and to have "assisted in the execution of sham transactions" that enabled funds to be "funneled" to the companies' owner in a manner that concealed his ownership and control of the purported tribal lenders. In its RICO counts, the indictment charges the defendants with participating in a criminal "enterprise" whose purpose was to enrich the defendants through the collection of unlawful usurious debts.

In a step that is unprecedented in our experience, the indictment also charges the defendants with criminal TILA violations. TILA imposes criminal liability on a person who "willfully and knowingly" violates TILA or Regulation Z, including by providing "false or inaccurate information or fail[ing] to provide information [required to be disclosed under TILA or Regulation Z]."

The indictment alleges that the companies' TILA disclosures were "materially deceptive and misleading" because they were based on a substantial understatement of the finance charge.  According to the indictment, for at least four consecutive paydays after a borrower obtained a loan, the defendants automatically withdrew from the borrower's account an amount equal to the disclosed finance charge and applied none of that amount to principal. This practice allegedly   resulted in payment substantially in excess of the amounts disclosed. This is not a case where borrowers were permitted to roll over loans but rather a case where the loan documents and practices of the lender allegedly resulted in automatic rollovers and, hence, finance charges and payment schedules at odds with the single payment contemplated by the TILA disclosures. According to the indictment, when faced with consumer complaints to state regulators or threatened lawsuits, the defendants often directed the companies to discontinue automatic withdrawals and cancel remaining principal balances.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).


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