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From Banking and Finance Law Daily, April 14, 2015

CFPB, Navajo Nation launch UDAAP action to combat unlawful tax-refund loans

By Thomas G. Wolfe, J.D.

The Consumer Financial Protection Bureau and the Navajo Nation have joined forces to combat an alleged scheme by companies and individuals to unlawfully steer low-income consumers, including many citizens of the Navajo Nation, toward high-cost tax-refund-anticipation loans (RALs). Accordingly, the CFPB and Navajo Nation filed a complaint in U.S. District Court for the District of New Mexico against S/W Tax Loans, Inc., J Thomas Development of NM, Inc., and certain individuals who are considered the principal operators of the respective companies. At the same time, according to an April 14, 2015, release, the CFPB and Navajo Nation have submitted a proposed order that, if approved by the court, “would result in roughly $438,000 in total consumer redress and require the defendants to pay $438,000 in civil penalties for their unfair, deceptive, and abusive practices” (UDAAP).

According to CFPB Director Richard Cordray, the alleged scheme “exploited vulnerable consumers by grossly understating loan rates and by deceiving them about the status of their tax refunds.” In his prepared remarks, Cordray observed that previously—in 2013—the CFPB had signed a Memorandum of Understanding “to work with the Navajo Nation’s Department of Justice on consumer financial issues.” Against this backdrop, Cordray noted that, in its “first enforcement action taken in conjunction with a tribal government,” the Bureau was now partnering with the Navajo Nation to “police illegal and abusive practices” and “to protect consumers in the financial marketplace.”

Similarly, Navajo Nation Assistant Attorney General Paul Spruhan commented, “This action puts lenders on notice that the Navajo Nation is prepared to enforce federal laws against predatory lenders to protect its citizens.”

Complaint—Facts. According to the complaint filed with the federal district court in New Mexico, defendant Jeffrey Thomas operated several H& R Block franchises in New Mexico and the territory of the Navajo Nation through his company, J Thomas Development of NM, Inc. Both the CFPB and the Navajo Nation emphasized that they “did not find that H&R Block participated in this scheme, and H&R Block terminated its relationship with those franchises.”

In addition, defendant Thomas set up and financed S/W Tax Loans, Inc. (Southwest). Southwest, formerly doing business as Fast Refund Loans, Inc., essentially was established “to offer Thomas’s tax clients short-term, triple-digit-APR loans secured by the consumer’s anticipated tax refund—also known as refund-anticipation loans (‘RALs’).” During the relevant time period, defendant Dennis Gonzales served as president of Southwest.

Among other things, the complaint alleges that: (i) Thomas ordered his tax preparers to “recommend only Southwest’s RALs and not to offer H&R Block’s more affordable alternative”; (ii) Thomas allegedly paid his tax preparers bonuses based on the number of tax clients who received Southwest’s RALs, and “concealed from consumers the financial interest he and his tax preparers had in each high-cost RAL they recommended”; (iii) Southwest grossly understated the annual percentage rate (APR) of the RALs in the pertinent agreements with consumers; and (iv) Southwest failed to disclose that consumers’ tax refunds had been received and would soon be available and instead sought to persuade consumers to take out additional RALs.

Complaint—Law. Based on the facts derived from the CFPB’s and Navajo Nation’s investigation, the complaint against the defendant companies and/or individual operators contains seven counts for violations of federal law. In connection with alleged violations of the federal Truth in Lending Act and its implementing regulation, Regulation Z, the complaint claims that Southwest failed to properly and accurately disclose the operative APR in its RAL agreements with consumers.

Likewise, in connection with alleged violations of the Consumer Financial Protection Act (CFPA), the complaint claims: (i) abusive steering; (ii) unfair extensions of credit; (iii) abusive extensions of credit; (iv) deceptive extensions of credit; (v) deceptive APR disclosures; and (vi) violations of the CFPA based on Reg. Z violations.

Proposed order. In addition to the approximately $184,000 in refunds that Southwest has already provided consumers for its allegedly deceptive APR disclosures, the CFPB’s and Navajo Nation’s proposed Stipulated Final Judgment and Order, seeks to: (i) ban Thomas and Gonzales for five years from offering financial products associated with tax refunds and from investing, financing, or working for any entity that offers those products; (ii) require the defendants to pay $254,267 in consumer redress, “enough to give full refunds of interest and fees to consumers who took out a second or third refund-anticipation loan because Southwest did not tell them their tax refund would soon be available”; and (iii) require the defendants to pay $438,000 to the CFPB’s Civil Penalty Fund.

The proposed order also contains recordkeeping and compliance monitoring provisions as well.

Companies: Fast Refund Loans, Inc.; H&R Block; J Thomas Development of NM, Inc.; S/W Tax Loans, Inc.

MainStory: TopStory CFPB ConsumerCredit InterestUsury Loans TruthInLending UDAAP NewMexicoNews

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