NEW YORK — New York's attorney general has accused an Anaheim lender of illegally charging triple-digit interest rates on personal loans, then hounding borrowers to collect payments when they inevitably fell behind.
The lawsuit, filed late Monday, alleges that CashCall Inc., a decade-old Internet lender well known from its ubiquitous advertising, charged as much as 355% in interest, far exceeding New York's civil and criminal usury limits of 16% and 25%, respectively.
Also named as defendants are WS Funding, a CashCall subsidiary, and Western Sky Financial in South Dakota, as well as their owners, J. Paul Reddam of CashCall and Martin Webb of Western Sky.
The suit says a person borrowing $1,000 could end up paying nearly $5,000 over two years. Someone borrowing $2,525 could be on the hook for $14,132 over four years.
"Western Sky and CashCall charged exorbitant interest rates on their loans to scam New Yorkers out of millions of dollars," New York Atty. Gen. Eric T. Schneiderman said.
The suit highlights what consumer advocates said is a common byproduct of today's soft economy — abusive lending practices that target vulnerable people who don't realize what they're getting into.
Cash-strapped borrowers take out short-term loans when they have trouble meeting routine expenses such as medical bills. They then quickly fall behind as high interest rates cause their debts to snowball.
"It's a huge problem," said Peter Holland, who directs the Consumer Protection Clinic at the University of Maryland's law school. "It's very deceptive. It's very exploitative."
CashCall defended its practices, saying: "We believe that the attorney general's suit is baseless, and we are confident that the New York courts will agree."
The company and Western Sky said they haven't seen the lawsuit and couldn't respond to the allegations in detail.
The two firms have run afoul of regulators in other states, including California. Schneiderman's suit cites 12 other states.
In 2009, CashCall paid $1 million to settle a case brought by then-Calif. Atty. Gen. Jerry Brown, whose office alleged the company ran deceptive ads and used "loan shark tactics" to collect debts from customers. The state accused the lender of threatening lawsuits or wage garnishment to intimidate borrowers.
At the time, CashCall was widely known for its celebrity pitchman, Gary Coleman of the 1970s and '80s TV show "Diff'rent Strokes."
Coleman became the company's spokesman after receiving a loan, which he repaid by endorsing CashCall in commercials. He died in 2010.
According to Schneiderman's suit, CashCall and Western Sky Financial targeted needy consumers with Internet and TV ads that promised "fast cash," often within 24 hours. On its website, CashCall said it makes loans of up to $25,000 "faster, easier and hassle-free."
"While interest rates are high, they are typically much lower than those of payday lenders, and CashCall Personal Loans have the potential to help customers rebuild their credit score by making payments on time," according to the website.
But that didn't impress Schneiderman's office.
Since 2010, the suit alleges, the three firms made 17,970 loans worth more than $38 million to New York consumers, and were owed as much as $185 million in interest and fees — nearly five times the loan amount.
The suit contends that the three companies and their owners engaged in an "illegal and deceptive scheme" that preyed on the state's consumers.
It laid out a scheme in which CashCall tried to circumvent interest-rate caps by claiming that Western Sky Financial, which made the original loans, was immune from state regulations because it was based on an Indian reservation.
"As an entity operating entirely within the exterior boundaries of the Reservation, and as provided in its loan agreements, Western Sky's transactions with borrowers are governed by the laws of the Cheyenne River Sioux Tribe, and any issues arising out of Western Sky's operations are subject to the jurisdiction of the Tribe," Western Sky said.
In reality, the suit alleges, Western Sky was the lender "in name only." CashCall arranged the loans in Western Sky's name, provided the capital for the loans and bore all risks involved in the lending, using WS Funding to acquire the loans from Western Sky, the suit says.
When borrowers had trouble paying their debts, the suit contends, CashCall aggressively pursued them.
"CashCall's collection calls are frequent, often every day," the suit says. "If the consumer does not answer the phone, the consumer may be called several times per day, at home and at work. Consumers have also been told that they would be visited in person and 'served' with papers, that their references would be called, and that an arrest warrant would be issued."
The suit comes a week after Benjamin Lawsky, superintendent of New York's Department of Financial Services, sent 35 online payday lenders cease-and-desist orders. Some customers faced annual interest rates as high as 1,095%.
CashCall was founded by J. Paul Reddam, a flamboyant horse-racing aficionado whose I'll Have Another won the Kentucky Derby last year.
Before CashCall, Reddam founded mortgage lender DiTech Funding Corp. That company also caught the attention of authorities: Three of the company's managers were prosecuted in a federal kickback scheme, but Reddam was never charged. He sold the company in 1999.
Reddam started his career as a philosophy professor. He earned his doctorate at USC and then taught at Cal State Los Angeles in the early 1980s.
One of the borrowers who complained to Schneiderman's office was Ed Matos, 49, a carpenter for a parks department outside New York City.
Last February, Matos, of Orange County, N.Y., needed quick cash to hire a lawyer after he was charged with drunken driving. He went to Western Sky's website and applied for a loan. The company wired nearly $2,600 into his bank account within two days.
As months went by, CashCall took over his loan and automatically withdrew about $296 from his bank account every month.
After already paying $4,000, he called CashCall and was told his payments would total $13,000 when they ended in 2016, he said.
"I couldn't believe it," Matos said. "I just feel like I'm being totally ripped off."
Tangel reported from New York and Hamilton from Los Angeles.Copyright © 2015, CT Now