Bloomberg News

I’ll Have Another Owner Fights States Over Loan Business

May 25, 2012

When his colt I’ll Have Another charged from behind to win the Preakness Stakes May 19, J. Paul Reddam joined an exclusive club of thoroughbred owners who’ve been one race short of the Triple Crown.

Not far from the Baltimore track, Maryland state regulators were probing the consumer loan business that helps fund Reddam’s wildly successful investment in horses.

Reddam, 56, a former philosophy professor, made his fortune with a subprime mortgage firm, DiTech Funding Corp., which he sold to General Motors Co. (GM:US) in 1999 for more than $240 million. He is now owner and chief executive officer of Anaheim, California-based CashCall Inc., which makes mortgage and short- term loans and has tangled with three states over alleged violations of consumer-protection laws.

West Virginia officials, among the firm’s most persistent critics, allege that CashCall violated state usury rules by using a front company to charge annual interest as high as 99 percent and engaging in abusive debt-collection practices.

“CashCall created a business model intended to fly under the protective radar of West Virginia laws,” Attorney General Darrell McGraw said in a 2008 press release when the lawsuit was filed. The case went to trial in October and a judgment hasn’t yet been rendered.

CashCall paid $1 million in August 2009, without admitting or denying wrongdoing, to settle claims by the state of California that its practices included making excessive calls to borrowers at work and at odd hours. Maryland, which last year proposed banning the firm from offering mortgages because of a licensing violation, also brought a 2009 action against CashCall that resulted in a pending $5.7 million fine from an administrative judge.

‘Different Idea’

Reddam, whose racing team is preparing I’ll Have Another for the final leg of the Triple Crown, the Belmont Stakes in New York on June 9, has CashCall emblazoned on his jockey’s silks. In a phone interview, Reddam said that the lender’s services are in heavy demand. He blamed the firm’s legal issues on the confusing patchwork of state regulations.

“Everybody has a different idea of what should and should not be done, and what’s okay in each state,” Reddam said.

Born in Windsor, Ontario, Reddam attended the University of Toronto and earned a Ph.D in philosophy from the University of Southern California. He taught at California State University, Los Angeles.

Reddam said he fell in love with horse racing while still a student. At Santa Anita track in Arcadia, California, he said, he was dazzled to watch Spectacular Bid, a horse that won the first two legs of the Triple Crown in 1979.

Lucrative Bet

By last year Reddam owned at least 34 thoroughbreds, according to the Jockey Club, which tracks horse names. One of them was I’ll Have Another, which he bought for a modest $35,000. The bet has paid off handsomely with purses totaling $2.7 million so far, according to the Jockey Club. Having won the Kentucky Derby and the Preakness, the colt needs a victory in the Belmont to become the first Triple Crown winner since Affirmed in 1978.

In a 2006 interview with the magazine of the Thoroughbred Owners of California, Reddam said he left academia for one reason: “Money.”

Reddam worked for several mortgage lenders before founding DiTech in 1995. Within three years its 700 employees were generating $45 million in annual revenue, according to an April 11 filing in U.S. Tax Court. Reddam sold DiTech to GMAC Mortgage Corp., a subsidiary of GM that became Ally Financial Inc. (ALLY:US) after its parent company’s bankruptcy in 2009.

‘Millstone’

DiTech became part of Ally subsidiary Residential Capital LLC, which because of subprime mortgage losses became “a millstone around the company’s neck,” Ally CEO Michael Carpenter said in 2010.

The subsidiary filed for bankruptcy May 14, days before the Preakness.

Like DiTech, CashCall advertises widely to drive traffic to its website. An early pitchman was Gary Coleman, who starred in the 1980’s TV series “Diff’rent Strokes.”

CashCall is on pace to originate $9 billion in mortgages this year, Reddam said. The firm also makes unsecured loans in amounts up to $25,000, according to its website. That part of the business amounted to about $180 million in loans last year, Reddam said.

In an example of a loan on its website, CashCall says it could offer a borrower $2,525 to be paid back in 47 installments at an annual interest rate of 184 percent.

Loans with such rates are illegal in states with usury laws such as West Virginia. CashCall initially dealt with the issue by contracting with Community State Bank of Milbank, South Dakota to make loans that CashCall would purchase within three days, according to Reddam.

State Lawsuits

Federal regulators ended the practice by 2006. Reddam said CashCall had already abandoned the arrangement because of a high default rate. Still, it became the basis of complaints by West Virginia and Maryland, which alleged that CashCall was outflanking state rules.

CashCall said in legal filings in West Virginia that the loans in question weren’t illegal because they were made by a bank, not by CashCall. The transactions didn’t fall under the state’s usury law “because the loans were made, originated and funded” by a South Dakota-chartered bank that was permitted under federal law to lend money in other states at the same interest rates, according to the company’s filing.

The company made a similar argument in the Maryland proceeding.

Maryland Cases

Reddam also asserted to the court that he is “neither actively, nor personally involved in the day-to-day operations and management of the company’s activities.” In a 2010 application for a business license in Colorado, however, Reddam filed a resume describing his CashCall duties as “responsible for devising and implementing all major company policies -- including its various loan programs and interest rates.”

CashCall has come up in three administrative actions by Maryland’s Commission of Financial Regulation.

The state last year proposed pulling CashCall’s license to offer mortgages because among other things it failed to disclose the California lawsuit in its application.

Maryland’s probe of CashCall’s partnership with banks in South Dakota and Delaware resulted in the preliminary $5.7 million fine in December 2010 from administrative law judge Nancy Paige, who called the arrangement “a deliberate attempt to avoid the constraints of Maryland law.” The fine is on hold pending an appeal in a related case involving a different company.

South Dakota Tribe

In the third matter, Maryland proceedings have uncovered details of a partnership that CashCall entered into with a different kind of lender, Western Sky Financial LLC, which operates from the reservation of the Cheyenne River Sioux, a federally recognized Indian tribe in South Dakota.

Western Sky’s owner, Martin A. Webb, has said his business, based in Timber Lake, South Dakota, isn’t subject to state rules because it’s on the reservation and because he is a member of the tribe.

“Simply stated, state law does not apply to enrolled tribal members within the confines of their home reservation,” Webb wrote in an April 14, 2011, statement to the West River Eagle, a newspaper.

Maryland regulators last year ordered Webb to stop doing business in the state and in February rejected his assertion that tribal immunity gave him the right to lend. Webb’s links with Reddam’s firm surfaced during the state’s inquiry. At a Jan. 31 public hearing outside Baltimore, an administrative judge heard from consumers who did business with Webb and wound up dealing with CashCall.

FTC Action

According to the hearing transcript, Peter Manilla, 61, of Silver Spring, Maryland, said that when he borrowed $2,500 from Western Sky Financial “all my documentation” referenced CashCall. “It will have 800 numbers that you could call, and if you call those numbers, CashCall always answers,” Manilla said.

Webb didn’t respond to interview requests. He is also the subject of an enforcement action by the Federal Trade Commission, which in September filed a lawsuit in federal court in South Dakota against Webb, Western Sky and associated companies for allegedly deceptive contract language and illegal wage garnishments.

Cynthia Jones, an assistant commissioner of enforcement for the Maryland regulator, declined to comment on the CashCall matters.

West Virginia

Norman Googel, an assistant attorney general in West Virginia who is litigating that state’s lawsuit against CashCall, said the details of the Maryland case echo Reddam’s earlier arrangement in South Dakota.

“Here again, it appears that Reddam has found a way to attempt to avoid state regulation,” Googel said in an interview after examining Maryland’s documentation.

Reddam, in the interview, acknowledged the arrangement with Western Sky. He added that he and Webb became friendly enough that he named a horse -- a losing one, Reddam notes -- after one of Webb’s other companies: Lakota Cash. The firm is also named in the FTC lawsuit.

There’s nothing wrong with CashCall’s business because it doesn’t arrange or fund the Western Sky loans but merely buys them after the fact, he said. The high demand for his business demonstrates that it’s filling an important gap in finance.

“The banking industry is missing this entirely,” Reddam said. “There is a tremendous need for people to borrow a few thousand dollars to help them over whatever crisis they are having, and the banks are not serving that need, and they should.”

In his interview with the horse-racing magazine in 2006, Reddam elaborated on his business success, attributing it to Americans’ shortcomings in financial management.

“We’re definitely not savers,” Reddam said. “So the market that CashCall has pitched to are people who are employed, making decent money, who spend it just as fast as they make it. It is what it is.”

To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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