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AG Cooper shuts down phony rebate payday loan scheme

Release date: 6/8/2004

Raleigh: A payday lender operating in western North Carolina that disguised its illegal loans as rebates for Internet service contracts has been ordered to stop, Attorney General Roy Cooper and Commissioner of Banks Joseph A. Smith, Jr. announced today.

“This company used rebates as a disguise to stick consumers with unfair loans that hit them particularly hard during tough economic times,” said Cooper. “We won’t allow illegal lenders like this one to skirt the law and hurt consumers.”

“North Carolina law protects borrowers from outrageous rates on loans,” said Commissioner Smith. “This payday lender broke the law and tried to cover it up by claiming it was providing Internet access.”

In a ruling issued late Monday, Wake County Superior Court Judge Stafford J. Bullock barred Speed Net LLC, which did business as American Funding, from making loans to North Carolina consumers in violation of state lending and consumer protection laws. The company, based in Knoxville, Tennessee, has locations in Asheville, Hendersonville, Hickory, Morganton and Newton in western North Carolina.

Under the judgment, consumers who took out loans disguised as rebates for Internet service from American Funding are no longer responsible for repaying them. American Funding is prohibited from offering purported Internet service rebates to customers and then requiring consumers to repay the rebate plus extra fees and charges. The company may not use any subterfuge to hide its loans and must cancel all contracts with consumers.

Today’s judgment resolves a suit brought by Cooper in February 2002, alleging that American Funding made loans by getting consumers to sign a one-year contract for Internet service. Under the contract, a consumer who received a $300 rebate had to make payments of $60 every two weeks for a year. The evidence showed that consumers did not want the Internet service, which consisted of a dial up number and a password. In reality, the rebate was a loan that consumers had to repay at annual interest rates of more than 500 percent. North Carolina’s Consumer Finance Act permits only a 36 percent interest rate on loans under $600.

Rates charged by American Funding were significantly higher than those permitted under a now-expired state law that governed payday lending and the company’s contracts also provided for automatic rollover of the loans, a practice prohibited under the former law. State legislators allowed the payday lending law to expire after four years on August 31, 2001. Cooper and Smith charge that American Funding continued to operate as a payday lender despite sunset of the law.

“People need access to fair loans to deal with emergencies so they won’t fall victim to schemes like this one,” said Cooper. “That’s why North Carolina needs an effective short-term lending law in place to protect consumers.”