The online lender Western Sky and the online loan servicer CashCall agreed to pay $1.5 million in penalties and stop collecting interest on outstanding loans to New York borrowers in a proposed settlement with New York Attorney General Eric Schneiderman.

Schneiderman sued Western Sky, CashCall and their owners, Martin Webb and J. Paul Reddam, in August, charging them with violating New York's usury and licensed lender laws by making loans with annual interest rates between 89% and 355%. New York law prohibits most nonbank lenders from charging annual interest rates above 16%. 

The settlement, which awaits court approval, requires the companies to refund New York borrowers who have paid more than the amount of their loan principal plus a 16% interest rate.

The agreement could give New Yorkers more than $35 million in debt relief, according to a press release from Schneiderman's office.

"With this agreement, thousands of New Yorkers exploited by Western Sky and CashCall will get the relief they are owed," Schneiderman said in the release. "As individuals in New York and across the country continue to face tough economic times, we must keep up the fight against those who exploit and scam them. Illegal collectors and lenders, in particular, must pay a price for their behavior and pay back the New Yorkers they harmed."

The companies made nearly $40 million in loans to New Yorkers since 2010, according to the release.

Western Sky, which is based in the Cheyenne River Indian Reservation in South Dakota, suspended operations in September under pressure from state regulators.

CashCall, which is based in Anaheim, Calif., continued collecting payments on Western Sky loans after state investigations had declared the loans void, prompting a lawsuit from the Consumer Financial Protection Bureau in December.

"It is unfair to collect money that consumers do not owe on loans that do not legally exist," CFPB Director Richard Cordray said in a conference call with reporters at the time. "It is deceptive to trick consumers into repaying illegal loans that state law has nullified in part or in whole. And it is abusive to take unreasonable advantage of a lay person's lack of understanding when it comes to the application of state and tribal laws."

Attorneys general in Colorado, North Carolina, New Hampshire and Indiana also filed lawsuits against CashCall in December, accusing the company of violating usury laws. 

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.