At least six federal agencies have embarked on a much-needed crackdown on Internet short-term lending, a burgeoning industry rife with abusive tactics.
The interest in Washington is good news for low-income consumers, who risk being slammed by enormous interest rates and fees in their quest for quick cash. But the federal actions, building on enforcement efforts by attorneys general in a number of states, are turning up the heat in Kansas City.
This region has embraced the noxious online payday loan industry in a big way.
Ask Arkansas Attorney General Dustin McDaniel. He has sued three Kansas City area residents and their companies, accusing all of violating his state’s tough usury laws by making online loans to Arkansas residents at annual interest rates that often exceed 500 percent.
“Anecdotally there appears to be a concentration of these businesses in the Kansas City area, but we really don’t know why," Jim DePriest, an assistant attorney general in McDaniel’s office, said.
The answer can be found in the office suites, country clubs and even wealthier churches where social and business networks are cultivated in this region. Online short-term lenders need investors. They need assistance from willing banks. They need legal and technical advice. All of that has been available here.
Kansas City and Johnson County, Kan., addresses show up frequently on the list of contributors to a national political action committee affiliated with the Online Lenders Alliance, according to OpenSecrets.org, a database compiled by the Center for Responsive Politics. Of 38 contributions larger than $200 made so far in the current election cycle, more than one-third are from individuals in the Kansas City area.
That may be partly because the alliance’s founder hails from Leawood, Kan. Mark Curry got the organization going in 2006. The next year, he purchased a Capitol Hill townhouse, from which the organization entertains members of Congress.
Curry and his businesses, including Geneva-Roth Ventures, have been sued in several states for online lending practices that allegedly violate state laws. He, along with area businessmen Josh Mitchem and Christopher Hodes, have agreed to make settlement payments to Arkansas and not make loans there anymore. Attempts to contact all three businessmen were unsuccessful.
Another sign of this region’s immersion in online lending shows up in a 2012 Securities and Exchange Commission document filed by EZCORP Inc., a nationwide pawnshop and payday loan operator. EZCORP reported it had purchased Go Cash, described as a company with “significant experience in U.S. online lending,” from James R. Carnes, a Johnson County businessman. The sale price was $50 million, with the potential for performance bonuses.
In an interview, Carnes said he got into the business about five years ago, intrigued in part by the success of another Johnson County businessman, Scott Tucker.
Tucker has made millions on Internet loans to low-income customers. He now has a fleet of race cars, a private Learjet and an $8 million vacation home in Colorado.
He is a poor role model, however. Authorities in several states have spent years trying to shut him down. A Federal Trade Commission lawsuit accused him of a pattern of deception that enabled his businesses to drain consumers’ bank accounts with frequent withdrawals and exorbitant fees.
Tucker has prevailed by purporting to be a mere employee of businesses owned by American Indian tribes, which claim sovereign status over state law. But investigators say the tribes receive only a sliver of the massive profits brought in by Tucker’s businesses, some of which operate out of an office building in Overland Park.
A spokesman for the Online Lenders Alliance said Tucker wasn’t a member of the group, which recommends “best practices” for online loans.
Carnes, who is a member, offered a robust defense of the industry, citing studies that praise high-interest, short-term loans as a guard against bankruptcies, punitive bank overdraft fees and other bad outcomes.
“It’s a product that improves people’s lives,” Carnes said. “You can look at any part of the financial sector and you’re going to find people who abuse the system.”
But the payday loan industry is inherently abusive. The mythical customer who gets into a jam, takes out a loan and pays it back in full in two weeks is a rarity.
The industry relies on exorbitant fees and repeat customers. A person who takes out the first loan will be besieged with offers of more quick cash. Online lenders often make larger loans and charge higher fees than storefront operators, who at least are bound by state regulations.
Right now short-term lending is governed by a hodgepodge of state laws, with online operators coming up with ingenious ways to evade them. The industry needs uniform regulations and enforcement at the federal level.
Unfortunately, some of the worst practices have roots in the Kansas City area. The concentration of online lending operations here is not a point of regional pride, but it does point to a wealth of financial, technical and legal expertise and creativity.
Here’s an idea: Let’s use some of that brainpower on a better way to help low-income people borrow money for emergencies without trapping them in ruinous debt.
Copyright The Kansas City Star. Reprinted with permission.