Carey V. Brown thought he was safe.
Since at least 2005, he has paid attorneys in Canada, Nevada, Georgia and Tennessee to create a network of nested businesses that have shielded his online payday loans from legal scrutiny, allowing him to charge fees. interest rates above the legal limit in many states, according to lawsuits filed across the United States.
Brown believed he was immune from state laws because he operated in the nebulous world of the internet, triggering the US Constitution’s Interstate Commerce Clause that gives Congress – in the form of federal agencies – the sole power to regulate it. The 50 states, Brown was convinced, could do nothing to stop him.
Brown had the situation under control. He had covered all angles. Except one.
Without warning, the business he had worked for all his life collapsed. The legal and philanthropic walls he built for himself have been rendered powerless. Someone has finally beaten the payroll genius of Chattanooga.
It was a little-known New York official named Ben Lawsky, who rose through the ranks pursuing terrorists and the Mafia, who ultimately found a way to stop Brown.
Lawsky was not the first public servant to try his luck against the Chattanooga businessman. In recent years, attorneys general across the United States have tried unsuccessfully to stop Brown from charging interest rates deemed exorbitant by lawmakers in many states.
Servers in Bermuda and on Indian reservations have left investigators guessing at the true scope and location of its businesses. Brown’s legal team sued workers who spoke to strangers or violated non-compete agreements. Its businesses were incorporated in Nevada, which has no usury laws. He paid third parties to maintain obscure PO box addresses for some of his businesses, most of which were in fact based in Chattanooga.
But that didn’t matter on August 6, when Brown’s empire began to crumble.
Brown started his career in high risk finance in Rossville where he worked at a buy here, pay here dealership named Happy Motors to pay for his college education, earning a finance degree. He built a handful of physical stores, but quickly recognized that the future of payday lending was online.
In 2007 he founded Basenine Inc., which later changed its name to Terenine, and then rebranded itself as Cloudswell. Other companies like Area203 Digital, ACH Federal, API Professional Services, SupportSeven, Credit Payment Services, and Eclipse in Action have split up or have been created as separate companies.
The companies were supposed to sell IT, marketing, and call center services, but they mostly worked in concert to support payday loan websites like MyCashNow.com, PayDayMax.com, and DiscountAdvances.com.
Brown ignored repeated requests for comment for this article. Journalists gathered the information in this story from a variety of sources, including former employees, legal documents and the online trail he left behind when he took office.
Brown officials changed the names of his support businesses from time to time and scattered them across town, telling reporters that payday loans were only a small part of what his businesses did, and that they could easily continue to operate if he decided to stop offering the loans, which carried an annual percentage rate of nearly 500 percent.
As his income grew, Brown publicly announced that he plans to donate $ 1 billion to charity, starting with a check to his alma mater, Tennessee Temple University. He has also donated millions of dollars to feed hungry children around the world. This step in the public eye was a dramatic departure for the man the associates had previously described as an intensely private person.
Brown said he was following the lead of Milton Hershey, owner of the Hershey Chocolate Co., who supported orphans with its substantial profits. In 2013, Brown said he had supported more than 10,000 orphans, founded 31,608 churches and brought 447,667 new believers to Christianity.
It hit a roadblock when the Chattanooga Times Free Press in 2011 tied the legally separate companies and reported that Brown was making unlicensed loans in Tennessee above the legal rate. After the article appeared, Brown stopped making high-interest loans to the Volunteer State, and the Tennessee Department of Financial Institutions, which declined to comment on the article, never announced any lawsuits against its businesses.
But New York is not Tennessee.
On Tuesday, August 6, New York Governor Andrew Cuomo announced that his state’s Department of Financial Services had identified Brown’s websites among the 35 that violated New York law. Cuomo demanded that Brown and others stop and refrain from offering “illegal” payday loans to New York consumers.
“Illegal payday lenders are rushing in and preying on struggling families when they are most vulnerable – hitting them with sky-high interest rates and hidden fees,” Cuomo said. “We will continue to do all we can to stamp out these pernicious loans that are hurting consumers in New York City.”
Harsh words, of course. But the lick was nothing unusual for Brown, who had received similar cease and desist orders from New Hampshire, California, Oregon and Pennsylvania. He passed them off as “ordinances concerning jurisdiction and interstate commerce.”
After Cuomo’s letter came another letter, this one from a bureaucrat few people outside of New York have ever heard of.
Most people are familiar with the Securities and Exchange Commission, which oversees the stock markets and sometimes makes public statements. But few Americans could name Lawsky, the state’s superintendent of financial services. Lawsky is the man who regulates Wall Street banks behind the scenes. It oversees approximately 4,400 financial institutions with assets of approximately $ 6,200 billion, with a “t”.
Lawsky has a legal background. After leaving his post as attorney general for the US Department of Justice, he pursued white collar crime, organized crime and terrorism cases for the Southern District of New York, preying on the worst enemies of the ‘America. Today, he keeps an eye on financial entities with New York charters like Goldman Sachs, Western Union, and American Express. He earned the nickname Ben “long-arm-of-the-lawsky”.
The former prosecutor found an innovative way to stop Brown that no state had ever tried. Rather than simply suing Brown, as others had done, Lawsky attacked the underlying mechanics of the system that allowed Brown’s business to thrive.
Here’s how the system works: Just as employers can pay their employees by direct deposit, Brown’s payday companies could, with authorization, deposit loans and withdraw payments directly from a client’s bank account. This happens through the computer magic of the nationwide automated clearinghouse, or ACH network.
The ACH network allows Brown to deposit $ 100 into the account of a customer who needs it to avoid losing a car, for example. But then it gets tricky. The next time a worker deposits a paycheck, the typical online lender only takes interest and finance charges from a consumer’s account, Cuomo said, leaving the original $ 100.
In a matter of weeks, the consumer could unconsciously owe more interest than the value of the original loan. This concept is called “churn,” and this is how payday lenders make a large chunk of their money, according to the Center for Responsible Lending.
“In most cases, consumers must affirmatively contact the payday lender if they really want to pay off the loan,” Cuomo wrote on Aug. 6.
Lawsky had an idea; an ending bypassing constitutional rules that had blocked other state regulators. If he could convince the banks to cut off access to the national grid that allowed Brown to access consumers’ piggy banks, then Lawsky could force Brown to follow state law without waiting for the federal government to act.
So he sent his own letter, this one to Bank of America, Capital One, Citigroup, JP Morgan Chase, Wells Fargo and dozens of others who together run the ACH network. Previously, the group claimed that there was no mechanism for them to identify illegal financial transactions. But Lawsky didn’t believe it.
Banks would be “a great asset in preventing their customers from falling victim to these illegal loans if they were aware of any questionable activity before such debits were made,” he wrote. As such, modifications to the ACH network may be necessary.
He then went further, offering a soft ultimatum.
“It is also in your bank’s long-term interest to take the appropriate steps to ensure that it is not serving as a pipeline for illegal behavior,” he wrote.
Faced with the choice between facilitating payday loans or doing a favor to a powerful regulator, the banks chose to cut access to the ACH system to 35 payday websites, including Brown’s. It kept him from doing business.
Weeks after Lawsky’s letter, each of Brown’s websites began serving a message that the site was temporarily down, with a phone number that existing customers could call. Several of the numbers have been disconnected. One issue linked a reporter to a customer service rep who said the website was facing a technical glitch and may be back online next week.
The next day, August 16, Brown called a meeting for Zone 203 workers, Cloudswell, Credit Payment Services, SupportSeven, and others. The money had stopped coming in. Immediately, 400 of its workers lost their jobs.
Uriah King, vice president of the Center for Responsible Lending, applauded the closure of Brown’s high-interest empire, calling it “a tremendous victory for families in every state.”
“Unlike the rotation of payday lenders, illegal lending can be stopped,” King said. “And states are leading the way.”
Contact editor Ellis Smith at [email protected] or 423-757-6315.