AGO: Loan sharks, beware!

Editor’s Note: In the story “AGO: Loan sharks, beware!”, which was published yesterday, the Saipan Tribune inadvertently misidentified Island Financial Services Inc. as Isla Financial Services Inc., which is a totally different and unrelated company. The concerned company in the story should have read Island Financial Services Inc. We regret the error and we are re-publishing the story with the correction. Our apologies to Isla Financial Services Inc., to its parent company, and to our readers.

By JOHN RAVELO
REPORTER

Attorney General Pamela Brown warned yesterday that her office will pursue enforcement actions against those engaged in illegal lending practices, such as certain payday loans and “five-six” loans.

At the same time, Brown disclosed that the Superior Court yesterday approved an agreement between her office and Island Financial Services, Inc., with the company agreeing to pay the AGO some $20,000, which will be returned to some 91 consumers.

In entering into the agreement—known as “Assurance of Voluntary Compliance”—the company, which does business as Payday Purchasing Co., denied the AGO’s allegations of illegal practices but said that it would conform its business practices to the requirements of the law to avoid protracted and costly litigation. The AGO lauded the company for its cooperation.

CNMI consumer counsel Brian Caldwell said the company had overcharged consumers by entering into credit transactions commonly referred to as payday loans.

Payday loans have been marketed as a quick way to get cash until the next payday. Consumers need to be employed for a period of time with their current employer or be receiving a government pension check to qualify. The lender requires the consumer to assign his interest over his next paycheck, making the loan virtually risk-free.

“Specifically, the AGO alleged that the interest rates charged by the company were not properly calculated or disclosed, and greatly exceeded the amount legally collectable under Commonwealth law,” Caldwell said.

“The AGO also alleged that certain collection practices employed by the company violated provisions of the Consumer Protection Act, and that the company was illegally operating a loan business without a license from the Department of Commerce,” he added.

Caldwell said abuses usually occur when payday lenders fail to comply with disclosure requirements of the Truth in Lending Act, which makes it difficult for consumers to understand the true cost of the loans.

“Consumers would be shocked to learn that the amount of many short-term payday loans may be as high as 500-percent APR or even greater in many cases. Undoubtedly, some consumers would choose to forego the loan in the face of such written disclosures. However, even when disclosures are made, they are frequently inaccurate, failing to take into account various fees and charges,” Caldwell said.

The AGO vowed to look into illegal fringe lending practices, including store lines of credit and pawn schemes.

Caldwell said “five-six” loans, a loan scheme wherein a consumer is made to pay $6 for every $5 borrowed, are usually illegal, reminding consumers of the usury law that protects them from usurious interests.

“Unless preempted by federal law, no court in the CNMI can enforce loan interest in excess of 24-percent APR. Additionally, if the lender does not have a license from the Department of Commerce, the lender may not charge more than 1 percent per month (12 percent APR) on loans greater than $300,” he explained.

Caldwell further explained that a lender may charge up to 2.8 percent per month only if he has a Commerce license, but he could not bring a court action to collect more than 2 percent per month.

The AGO warned lenders who charge double those rates that they could also be liable under the federal Racketeering Influenced and Corrupt Organizations Act.