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Report of Examination gives look inside payday lender’s alleged wrongdoing

 

all american check cashingBy TED CARTER

ted.carter@msbusiness.com

Beyond allegedly making illegal payday loan rollovers as a company policy, Madison-based All American Check Cashing deliberately withheld refunds due borrowers, banking regulators say.

Like banks and credit card companies, check cashing and payday lending stores must promptly refund overpayments to customers. That didn’t happen at All American, according to a Report of Examination the Mississippi Department of Banking and Consumer Finance completed in May 2015 and forwarded to All American’s owner Michael Gray.

Banking examiners say the over-charges are actually “double-charges” the lender collects by requiring a post-dated check from the borrower for the loan amount and fees when a loan is made. The lender gets the double-charge by processing the check through the Automated Clearing House, a nationwide electronic network for credit and debit transactions, while also collecting an in-store cash payment from the customer, according to examiners.

All American had an “unwritten” policy of not refunding customers for overpayments, unless and until the customer specifically requested a refund, examiners say.

» READ MORE: All American’s lawyers say state ‘thuggery’ behind proposed penalties

Each failure to provide a refund amounts to All American charging an actual fee that “far exceeds the fee allowable by state law,” the Report of Examination noted.

In its self-reported violations, All American says it withheld only 60 refunds as of Sept. 5, 2014 with a total refund amount of $5,436.88. This figure is way too low, examiners say, noting that just a couple months earlier All American admitted to having 140 overpayment refunds totaling $23,500 it had not repaid.

“The self-reported violations… appear to be a fraction of the total refunds due,” examiners say, and note at the conclusion of the report the banking department can levy a civil penalty of up to $500 for each over-charge All American failed to refund.

Memphis attorney Peter Baskind of Dinkelspiel Rasmussen & Mink, a firm representing All American, has criticized the reliance of examiners on the term “appear” in detailing offenses attributed to All American. The Report of Examination, he said in a federal court hearing Feb. 12, is packed with “innuendo” and “unsubstantiated allegations.”

The claims regarding refunds are among the many allegations detailed in the Report of Examination.  The department says it based the report on a mass of information and documents reviewed, as well as video and audio evidence obtained from security systems at All American stores. Other audio and video evidence comes from recordings done by examiners in visits to the stores in early June 2014.

Information gained from sworn statements from customers and employees also went into the report.

Examination reports typically are kept confidential but lawyers for Gray made the report public by including it in federal court filings seeking to stop banking regulators from revoking licenses of All American’s 43 Mississippi stores and assessing the company a $3 million fine.

The Report of Examination details repeated difficulties examiners encountered in attempting to question store employees and supervisors and to review transaction records and other documents. All American did not limit its obstruction to stores, regulators say, and note the company initially blocked examiners from seeing business records at All American’s Madison headquarters. The examiners call the refusal a “major violation” and say they “presume” that All American destroyed or hid important and unfavorable documents during the lockout.

Once they gained access to the records, examiners uncovered what they say is a company training document detailing how to do fee-only transactions for borrowers who have only a monthly source of income. Company executives and training managers widely circulated the training document, examiners say.

Done as instructed in the training document, the loan generates the same fees in two weeks that it would get in a 30-day loan.

The Report of Examination also gives accounts of illegal fee-only transactions taking place at All American stores as examiners stood by recording with video cameras.

At the heart of All American’s troubles are allegations from banking department examiners that company stores made thousands of illegal loan rollovers by which it encouraged borrowers  to continually pay the loan fees of $20 per $100 on two-week loans instead of the principal owed. This created a new loan and trapped borrowers in a cycle of debt, examiners say.

In addressing the method used to erase records of  double payments from customers and the failure to make refunds, the Report of  Examination alleged that All American “appears” to have a practice to quickly remove, or “wipe,” the information related to overpayments from the company’s records. The result, examiners say, is “company employees have no incentive to refund or otherwise credit a customer’s account.”

The overpayments are unearned by All American “and therefore represent an unjust enrichment” of the company, the Report of Examination says.

Examiners say they have evidence the overcharge scheme began in 2011 and All American’s software provider helped to carry it out. The practice continued on a monthly basis, examiners say.

In its report, the banking department said All American must make good on all customer refunds. If the borrower can’t be located, All American must deposit the refund with office of the State Treasurer.

The banking department’s report says Gray made  unauthorized loans to himself from company coffers after the department began its investigation. These include an apparent commercial loan of $950,000 he paid back in spring 2015, examiners say. Gray also arranged for All American to make another loan of an unspecified amount to another business entity in which he has or had ownership interests. Neither All American nor Gray is “authorized to make such a loan pursuant to the Acts or Regulations,” said Taft Webb, the banking department’s director of consumer finance, in a Jan. 29 notice of license revocations and the $3 million penalty.

Webb said in his notice that the department has also received reports of sporadic loan rollover activities in the many months since the Cease and Desist order of June 2014.

Nonetheless, the order has hurt All American Check Cashing’s fiscal health, according to examiners, who say a December 2014 examination of company books showed the percentage of loan defaults has doubled since regulators put a stop to the fee-only payments.

More losses could be ahead for Gray if regulators revoke his store licenses, thus giving him no legal way to collect on outstanding loans. It is illegal for a borrower to make a loan payment to an unlicensed payday lender.

One former All American executive estimated the company typically has about $10 million in loans out at any one time.

The banking department contends that ending the fee-only loan arrangements has put All American on a more equal footing with competitors they say Gray used to boast he could dominate because he did loan rollovers and they did not. Gray ended up buying out some of those same competitors, examiners say.

All American “clearly gained an unfair advantage over competitors by virtue of its willingness break the law,” the Report of Examination said.

Meanwhile, All American’s troubles are unlikely to end with state penalties. The federal Consumer Financial Protection Bureau has done its own investigation of alleged violations. The banking department says Gray has made a settlement offer to the CFPB.

The Bureau will not comment on its investigation until it is completed and any penalties are decided.

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About Ted Carter