How a Chattanooga payday lender avoided prosecution here

"We do not know why the matter was not pursued more aggressively by the Tennessee authorities," Winsett said. "It might be the result of insufficient funding and lack of sufficient staff to investigate such matters properly."

The state Department of Financial Institutions subsequently refused to answer the newspaper's questions about Brown's case, saying its records are sealed by law.

Such secrecy is not unusual, and is designed to protect the reputations and identities of businesses and individuals who are never charged with a crime or are found to be innocent after an investigation, officials have said.

A highly placed source inside Brown's business, who spoke privately given Brown's record of suing employees, told reporters that Brown was negotiating a "consent decree" with the TDFI. But no such decree was ever made public, and TDFI general counsel Tina Miller refused to confirm whether negotiations ever took place or were resolved.

Months later, Brown stopped making loans in Tennessee, though he continued making loans in other states.

A spokeswoman for Tennessee's attorney general said state prosecutors' hands were tied unless the Hamilton County DA requested help.

"The Tennessee Attorney General does not have the jurisdiction to independently pursue this type of case under Tennessee criminal or civil statutes," spokeswoman Sharon Curtis-Flair said in an email. "Jurisdiction for a state criminal prosecution, if supported by the facts, would lie with the appropriate District Attorney."

But retiring DA Bill Cox said he never received a referral from the TDFI indicating that criminal prosecution was warranted.

"It may be against the law, but not everything that's against the law is a crime," Cox said.

Ryan Hughes, chief legislative officer for the TDFI, said the state's process for charging white-collar violators is highly subjective and subject to a number of factors.

"Typically, when conduct is alleged to be criminal in nature, the department collaborates with various law enforcement agencies," Hughes wrote in an email. "Judgments are based on several factors including the nature and severity of the conduct to determine how and whether to prosecute the alleged crime. It may also be determined that the specific activity in question does not sufficiently fall within the criminal statutes."

On the other hand, the heavy workload required to secure a misdemeanor conviction may have dissuaded prosecutors, said Dwight Aarons, an associate professor of law at the University of Tennessee, who teaches a class on white-collar crime.

"If you have someone, and it really sticks in their craw that this ought not to be done, then they might devote the resources and the time to secure a conviction and convince the public as to why this is a moral outrage," Aarons said. "So part of it might be that we have yet to get that crusader in white to make sure that the people struggling financially are not further victimized."

INVESTIGATIVE UNDERSIGHT

Tennessee's stance on what the Center for Responsible Lending calls "predatory loans" may stem from the fact that the state is, in effect, the birthplace of such loans. The late Toby McKenzie, for whom UTC's McKenzie Arena is named, made millions of dollars in the 1990s pioneering high-interest, unsecured loans for those without access to traditional credit.

Cleveland, Tenn.-based Check Into Cash, founded in 1993 by former Credit Bureau of Cleveland owner Allan Jones, was also an early entrant into the payday lending world, and today is one of the largest such lenders across the U.S.

Payday loans are extremely popular among consumers. And nontraditional lenders receive far fewer consumer complaints than mainstream banks and mortgage lenders, according to the TDFI's annual report.

Tennessee, which has specifically legalized payday loans, has not followed the current wave of legal pressure to clamp down on the practice, said Diane Standaert, legislative counsel for the Center for Responsible Lending.

"We're seeing more states refusing to legalize payday loans, and some states that used to legalize them and now they're not," she said. "This is a question that the public in Tennessee must decide."

But Jabo Covert, senior vice president for government affairs at Check Into Cash, said loans made in line with state rules provide an important service for customers who need short-term cash to make ends meet.

A blanket ban on payday loans would be like a blanket ban on the mortgage business after Bank of America was forced to pay billions of dollars to federal regulators for illegal loans made in the run-up to the mortgage crisis, he said.

"Does that mean that mortgages are bad? Does that mean that every mortgage by big mortgage banks is criminal? No, it means the regulators say they did some things that went astray of the law," Covert said. "Every payday loan is not bad; every payday loan is not illegal."

Check Into Cash only operates in states where it can comply with the law and turn a profit, Covert said. Hence, the company does not do business in New York, which limits lenders to annual rates of 25 percent. That's far too low for short-term, unsecured loans that many borrowers fail to repay.

"We follow all federal, state and local laws at great cost to us, we don't make the profit that other people make, and we spend a lot more on regulation and compliance than other people do," Covert said.

Brown's syndicate made plenty of profit, pulling in about $150 million in fees and interest in 2012, according to the Manhattan district attorney's indictment.

Brown claimed that his loans were legal because he was operating from the Internet and was subject to more permissive federal, rather than state, rules governing interest rates. He asserted that he was immune to state laws under the Interstate Commerce Clause, which would have given federal rather than state agencies the power to regulate his business.

Brown went to great lengths to avoid falling under state statutes.

For the payday lending website FourSeasonsCash.com, Brown worked with Martin "Butch" Webb, a member of the Cheyenne River Sioux Tribe, which as a federally recognized tribe enjoys sovereign immunity from state laws. Brown installed servers in Bermuda and other overseas locations so that websites MyCashNow.com, DiscountAdvances.com and PayDayMax.com could appear that they were international in scope when in fact they were operated from Chattanooga.

Those legal tactics and their legal champion, Brown's attorney Joanna Temple, will come under scrutiny when Brown's case is heard in New York.

PAYING FOR PROSECUTION

Payday lenders' complex corporate structures and legal maneuvers, combined with prosecutors' lack of funding and legislative support to enforce state rules, is leading some policymakers to push for regulations with more teeth. But such solutions are still in the planning stages.

A bill filed in the U.S. House and Senate would cap interest rates at 36 percent per year, well below what payday lenders say they need to charge in order to make a profit on unsecured loans and could preempt states' ability to legislate their own financial affairs. Its House sponsor is by Rep. Steve Cohen, D-Tenn.

"Protecting consumers from predatory lenders -- whether they claim to operate in Tennessee or elsewhere -- has always been and will continue to be a priority of Congressman Cohen," said Ben Garmisa, Cohen's communications director.

However, with just days left in the legislative session, the bill has not been considered by the House Financial Services Committee.

The Consumer Financial Protection Bureau, which has begun to take over enforcement of some federal lending laws from other agencies, also has promised to clamp down on certain aspects of payday lending. But the agency has yet to release new rules for payday lenders or issue guidance detailing how it may proceed.

The short-term solution -- enforcing existing state laws -- would likely require specific funds earmarked by legislators to combat white-collar crimes, similar to money dedicated for Medicare fraud, drug trafficking and sexual crimes against minors, said Pickrell, who has worked as an attorney for 22 years on both sides of white-collar crimes.

"There are choices," he said.

"When we decide where we spend our money, and how we organize our officers and prosecutors into teams, we are deciding what crimes are going to be prosecuted. When you increase resources for prosecuting certain offenses, you're going to get more prosecution."

Contact staff writer Ellis Smith at 423-757-6315 or [email protected] with tips and documents.

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