Legal action brought by New York State last month against Condor Capital Corp., a Long Island subprime lender accused of bilking customers out of millions of dollars, could signal an increase in state prosecution under Dodd-Frank federal laws.
Legal experts say the case, even though it involves wildly egregious practices by Condor, could be the first of many by states against auto lenders, even if the lender’s nefarious actions are more modest than Condor’s.
In April, New York’s Department of Financial Services obtained a temporary restraining order in federal court against Hauppauge, N.Y.-based subprime auto lender Condor Capital Corp. and owner Stephen Baron. The case is being handled in U.S. District Court for the Southern District of New York.
The state’s complaint paints a picture of a company run with disregard for compliance. However, a former senior Condor employee told Auto Finance News that Condor’s practices might have been even worse than what was described in the state’s complaint. The former manager of Condor’s collection department told Auto Finance News that management thumbed its nose at the very notion of compliance.
Plain and simple, the federal law provides state regulators with a new tool according to Law Professor David Reiss from Brooklyn Law School.
“States have historically identified new forms of unfair, deceptive, or abusive acts and practices before they get on the radar of national regulators, so states are likely to be quicker to take action than their federal counterparts,” Reiss said. “In all likelihood, the New York case, as well as a case from the attorney general in Illinois, are just the tip of a burgeoning enforcement iceberg.”
FIRST LEGAL ACTION
The Condor case is the first legal action initiated by a state regulator under section 1042(a) of the Dodd-Frank Act. That provision empowers state regulators to bring civil actions in federal court for violations of Dodd-Frank’s consumer protection requirements, and to obtain restitution for abused customers and other remedies provided for under that law.
“The Dodd-Frank Act gives the Federal Trade Commission rule-writing authority over unfair, deceptive, or abusive acts or practices, and allows state law enforcement and regulatory agencies to pursue lenders for UDAAP violations,” said Braden Perry, a partner at Kansas City-based Kennyhertz Perry LLC (www.kennyhertzperry.com) law firm.
Although the majority of small lenders operate within the realm of law, the prosecution of Condor is a very loud shot across the bow of everyone in the space. Condor’s lesson to lenders is that auto finance operates in a much more regulated environment than it did even one year ago.
“Small lenders should pay attention to the fact that consumer lending is a highly regulated industry, and they are never too small for accurate and careful record-keeping and compliance,” said Jason McCarter, a partner and member of the litigation practice at Atlanta-based Sutherland, Asbill & Brennan LLP (www.sutherland.com).
State regulatory moves may depend on factors as simple as a regulator’s willingness to pursue a headline-grabbing action such as the one against Condor, lawyers said. In addition to New York, states most likely to see similar actions include California, Illinois, Massachusetts, and Minnesota.
As of press time, the NYSDFS had not returned phone calls or email requests for details surrounding the case, instead referring Auto Finance News to the complaint. AFN has filed a Freedom of Information Act request with the State of New York for additional information related to the Condor case. That request remains pending.
DETAILS OF DECEPTION
For two and a half years, the former manager sat in a center office in Hauppauge, N.Y., overlooking an open floorplan that included three rows of cubicles for the 25 or so staff members he managed. The manager told Auto Finance News that Condor employees were instructed by company owner Baron to never inform consumers if they had overpaid on their loans, he said.
In many states, the law mandates that any credit on lender fees, even a little as $1, must be returned to the borrower.
NYSDFS confirmed in court documents April 29 that Condor’s current controller, Donald Kalechofsky, told state officials that the company’s formal policy was, indeed, to not refund positive credit balances. Auto Finance News contacted Kalechofsky on his cell phone to confirm this policy. He declined to comment.
The former Condor manager also told Auto Finance News that during some meetings with Baron, the manager expressed concern about the poor quality of auto loans Condor was originating, despite the fact that Condor played in the deep-subprime space. The manager alleged that the company made those risky loans because of the value of the vehicle that could be repossessed. In other words, repossession was the goal.
It was common for a person working at a grocery store, making $10 an hour, to take out a loan with 19% interest and $900-per-month payments on a new GMC Suburban, according to the former manager.. After Condor issued the loan and the consumer had the keys, the company would move to repossess after the first missed payment, then rush the car to auction. Later, in civil court, the company would seek a deficiency judgment. The system the company had in place almost always reaped a profit, the manager said. When he left the company, there were more than $35 million worth of loans being litigated, he said.
A review of Nassau County Court records revealed 3,392 civil cases and 27 Supreme Court civil cases on file that were brought by Condor. The former manager said that Condor employed a law firm in Bellmore, N.Y., almost exclusively to pursue these cases.
BELOW THE SURFACE
Below the surface, the lender’s practice was worse. One day, during lunch, the company’s chief financial officer whispered to the manager that Baron had confessed to a separate, secret loan portfolio at Condor. “The company was making real estate loans, which Condor was not chartered to do,” the manager told AFN. “Those loans were not on the accounts receivable.”
Auto Finance News could not verify this claim by press time.
When the manager left Condor, the company’s portfolio was approaching $350 million. Media reports have placed the figure closer to $300 million.
Even when courts told Condor to cease and desist, it apparently did not. The former employee told AFN that the company had been planning a move to Florida. Indeed, on May 9 the federal judge presiding over the case, Colleen McMahon, ordered Condor CEO Baron to appear in court after she discovered that, despite a temporary restraining order, the company had allegedly been conducting business in Florida at a branch office
Meanwhile, the former employee said that said Baron kept apartments in New York, including an apartment at Trump Plaza. Court documents show investigators found monthly checks made out to “Trump Corp-Trump Palace,” as well as to “The Royale Condominium” on East 64th Street. He also said that Baron kept an apartment in the office building in Hauppauge.
AFN left Baron messages on his cell phone and office number, but he did not return the calls.
According to the complaint, the DFS received information in November 2013 that indicated longstanding wrongdoing. The following month, regulators from the department arrived at the Hauppauge office and conducted an unscheduled examination of Condor. State examiners spent two days on site, where they collected about 200 loan files and met with Condor management.
In January, examiners spent about three weeks on site at the Condor offices, conducting a triennial safety and soundness examination. Attorneys speaking on background said that information, security, and privacy violations likely raised the most significant red flags.
According to the lender’s website: “Condor Capital Corp. secures your personal information from unauthorized access, use, or disclosure. Condor Capital Corp. secures the personally identifiable information you provide on computer servers in a controlled, secure environment from unauthorized access, use or disclosure.” But regulators found this was not true. The state said hard copies of customer documents and files were often not locked up, often left unattended on desks for indefinite periods. The company stored files on open shelves in a garage attached to the Hauppauge office.
There were virtually no documented policies and procedures for almost all the company’s operations, according to the lawsuit. And, there were no systemic plans or programs to assess or monitor compliance with fair lending and debt collection practices, or data security laws and other applicable consumer protection laws. Condor had no internal audit function, segregation of duties, or other basic accounting controls.
And, as result, Condor was a petri dish for fraud, manipulation, and error.
“I think it’s a given, you obviously can’t steal from your customers, but beyond that, formal loan protocols and record-keeping policies, as well as safeguard practices, are not just a good idea, they are essential,” said McCarter of Sutherland, Asbill & Brennan.
In an April 24 court statement, DFS IT Examiner Madaline Martinez said when regulators investigated the company, they found that Condor did not perform IT audits. Further, it did not have a designated information security officer or program. Condor did not download the Office of Foreign Assets Control list on a daily, or even frequent, basis. The company also did not perform “penetration tests” on its website to protect against hackers, she wrote.
“In the five years I have worked for the department as an IT Examiner, Condor is the worst licensee I have ever examined,” Martinez said in the statement.
McCarter said consumer complaints about debt collection, which were filed against Condor, are a red flag for regulators. When a lender receives a customer complaint, it needs to take the grievance very seriously, he said. The same goes for audit requests from regulators.
Perry of Kennyhertz Perry agreed, noting that lenders must have a strong and clear process for handling complaints. “Being able to monitor the frequency and types of complaints may cure or change an issue that consumer is having without the need for regulatory intervention,” he said.
For example, the presence of complaints alleging that consumers did not understand certain terms of a product or service may be a red flag to improve the terms and provide additional information. Complaints to the lender should be logged and kept as part of the records that are subject to review by regulators.
As the complaint notes, even after repeated warnings, Condor pled poverty, claiming that compliance with DFS directives was too expensive. McCarter said that’s no excuse.
“Beyond this essential legal requirement, compliance is good for business,” he said. “You’ll inspire consumer confidence if you’re organized and have good record-keeping. Yes, there’s a cost involved, but one might hope that’s offset significantly by consumer confidence.”