[Vision2020] Find the Loan Behind the Loans

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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September 7, 2013
Find the Loan Behind the Loans By GRETCHEN
MORGENSON<http://topics.nytimes.com/top/reference/timestopics/people/m/gretchen_morgenson/index.html>

ONLINE lenders who charge borrowers stratospheric interest rates are coming
under pressure from state regulators — and it’s about time. But to get at
the root of the problem, the regulators may need to dig much deeper.

Last month<http://dealbook.nytimes.com/2013/08/12/new-york-attorney-general-sues-high-interest-lender/?_r=1&>,
for example, the New York attorney general followed other states’
regulators in suing Western Sky Financial and its affiliate Cash Call Inc.
The lawsuit contended
that<http://www.ag.ny.gov/press-release/ag-schneiderman-sues-western-sky-financial-and-cashcall-illegal-loans-over-internet>rates
charged to borrowers by the companies — from 89 to 343 percent,
depending on loan size — far exceed the caps determined by the state’s
civil and criminal usury laws. A borrower receiving $1,000 could wind up
owing almost $5,000 in finance charges, fees and principal over two years,
the complaint said.

Last Tuesday, Western Sky suspended operations, saying it was a victim of
regulatory overreach, though its affiliate, Cash Call, was still
functioning. Katya Jestin, a lawyer at Jenner & Block who represents the
companies, said that because Western Sky operated on the Cheyenne River
Indian Reservation in Eagle Butte, S.D., New York officials had no
jurisdiction over it.

“We will be moving to dismiss the suit against Cash Call and the other
parties,” Ms. Jestin said in an interview on Thursday. “Consumers
voluntarily entered into the loans and agreed when they signed the loan
agreements to be bound by the laws and the courts of the Cheyenne River
tribe. The A.G.’s lawsuit is an attempt to sidestep these agreements and is
an infringement on the tribe’s inherent sovereign rights and the rights of
its members.”

It is unclear what more might happen with the New York attorney general’s
case. But here’s a suggestion: When prosecutors pursue payday lenders, why
not go further? Investigators should track down — and disclose — the
institutions and individuals who make these operations possible by
providing the capital that such companies need to conduct their business.

The capital needs of companies like Western Sky are crucial because, unlike
banks, they don’t take in deposits that they can turn around and lend. They
have to rely on financing from other sources.

According to the attorney general’s complaint, Western Sky makes loans for
which Cash Call, based in Anaheim, Calif., provides funding. Cash Call also
acts as the servicer on Western Sky’s loans, collecting interest and
principal payments from borrowers.

The question that the complaint doesn’t answer is this: Who is willing to
provide the capital that enables Cash Call to finance what regulators say
are predatory loans?

When asked if the office was investigating who was financing the company,
Damien LaVera, a spokesman for the New York attorney general, declined to
comment. He said the investigation was continuing.

I’ve found a preliminary answer. Documents from a 2007 lawsuit show who was
providing financing assistance to Cash Call in previous years. The
institutions included Deutsche Bank Securities and a unit of Citigroup,
known as the CIGPF 1 Corporation.

That lawsuit was brought by Cash Call against CIGPF in Federal District
Court in New York. It related to a dispute over the bank’s financing
arrangement with Cash Call. The suit was subsequently dismissed, but the
court documents remain — and they provide a glimpse of the relationships
between Cash Call and its bankers, Deutsche Bank and Citigroup.

Cash Call, the lawsuit said, obtained financing for its lending business
from two credit facilities. The so-called senior facility, totaling as much
as $1 billion, provided capital for about 90 percent of Cash Call’s
consumer loans, the lawsuit said; a junior facility covered the rest.

Deutsche Bank Securities led the senior facility, or line of credit, which
was backed by a variety of lenders, including CIGPF. The lawsuit said that
this Citigroup unit had $20 million invested in this lending facility.

The smaller line of credit also involved both Deutsche Bank and the
Citigroup unit. According to the suit, CIGPF invested $30 million in this
facility.

Under these credit agreements, money repaid to Cash Call by its consumer
borrowers first went to Deutsche Bank, which deducted “its interest and
other earned fees.” It is unclear what Deutsche Bank earned from this
arrangement.

After the bank deducted what it was owed, the lawsuit said, the remaining
money was divvied up among other investors in the credit facility,
including CIGPF.

I asked representatives of
Citigroup<http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html?inline=nyt-org>and
Deutsche Bank why the banks would want to provide backing for
companies
making high-cost and possibly predatory loans. Renee Calabro at Deutsche
Bank<http://topics.nytimes.com/top/news/business/companies/deutsche_bank_ag/index.html?inline=nyt-org>said
only that the bank ended the relationship with Cash Call in 2007. That
was before the Cash Call unit began operating on the Indian Reservation.

Danielle Romero-Apsilos, a Citibank spokeswoman, said the bank no longer
lent to Cash Call. She declined to say why Citibank did business with the
lender, noting that the bank does not comment on clients.

Adam J. Levitin <http://www.law.georgetown.edu/faculty/levitin-adam-j.cfm>,
a professor of law at the Georgetown University Law School, said the fact
that banks like Deutsche and Citi did any business with Cash Call
highlights the problem of large financial institutions enabling
questionable practices by smaller outfits.

“It looks as if the New York banks were using online payday lenders to
circumvent New York’s usury laws,” Mr. Levitin said in an interview last
week. “The banks provide the financing for payday lenders to make loans the
banks think are too unseemly or risky — or illegal — to make themselves.”

The funding arrangements used by Western Sky and Cash Call are reminiscent
of what occurred in the recent mortgage mania. The most egregious predatory
lending wasn’t done, for the most part, by big national banks. It was done
by smaller subprime mortgage companies like New Century, NovaStar and
Fremont General, which made thousands upon thousands of loans.

But these companies wouldn’t have been able to make even 100 loans had they
not gotten the money they needed from the big Wall Street banks. The
warehouse lines of credit provided by those banks, therefore, enabled the
underwriting of billions of dollars in dubious
mortgages<http://topics.nytimes.com/your-money/loans/mortgages/index.html?inline=nyt-classifier>.
Without access to that money, most of the worst loans would not have been
written. When Wall Street cut off the credit spigot, these companies folded
almost overnight.

Another Wall Street-as-enabler example involved Bear Stearns, which
financed boiler-room stockbrokers such as A. R. Baron, Stratton Oakmont and
Sterling Foster in the 1990s. A case brought against Bear Stearns by the
Securities and Exchange Commission and the Manhattan district attorney in
1996 said the bank helped A. R. Baron commit securities fraud by providing
financing. Bear Stearns, which collapsed in the mortgage meltdown, settled
the A. R. Baron suit without admitting or denying the accusations. It paid
$38.5 million in fines and restitution.

Regulatory cases that crack down on questionable lenders are surely
welcome. But dubious actors can’t operate without the help of their
financiers. Investigators should follow the money.




-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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