THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF

THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF SOUTH CAROLINA

(GREENVILLE DIVISION)

CONSUMER FINANCIAL PROTECTION )

BUREAU, )

)

Plaintiff, ) Case No.

)

v. )

) COMPLAINT

HEIGHTS FINANCE HOLDING CO. f/k/a )

SOUTHERN MANAGEMENT )

CORPORATION; COVINGTON CREDIT )

OF ALABAMA, INC.; SOUTHERN )

FINANCE OF TENNESSEE, INC.; )

COVINGTON CREDIT OF GEORGIA, )

INC.; SOUTHERN FINANCE OF SOUTH )

CAROLINA, INC.; COVINGTON CREDIT )

OF TEXAS, INC.; COVINGTON CREDIT, )

INC.; and QUICK CREDIT )

CORPORATION )

)

Defendants. )

The Consumer Financial Protection Bureau (Bureau) brings this action against

Defendants Heights Finance Holding Co. f/k/a Southern Management Corporation and

the following of its wholly owned subsidiaries: Covington Credit of Alabama, Inc.;

Southern Finance of Tennessee, Inc.; Covington Credit of Georgia, Inc.; Southern

Finance of South Carolina, Inc.; Covington Credit of Texas, Inc.; Covington Credit, Inc.;

and Quick Credit Corporation (hereinafter, all defendants referred to collectively as

“Southern” or “Defendants”) for violations of §§ 1031(a), 1036(a), and 1054(a) of the

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Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C.

§§ 5531(a), 5536(a), 5564(a), and alleges as follows:

INTRODUCTION

1. Borrowers and lenders normally have a shared and mutually beneficial interest in

the full and timely repayment of a loan. The borrower can obtain money for an

expenditure, and the lender can profit by earning interest on loan principal over the

course of the repayment term. When the borrower successfully repays the loan, the lender

reaps a profit; when the borrower cannot repay the loan, the lender suffers a loss. So,

lenders normally have an incentive to structure, underwrite, and service their loans to

ensure that borrowers can successfully repay them.

2. But Southern’s business model turns this normal borrower-lender relationship on

its head. Southern makes high-cost installment loans to borrowers in persistent financial

distress. Southern’s borrowers typically have low incomes, impaired credit, and few, if

any, alternative loan options. And when they turn to Southern for a short-term loan,

Southern frequently snares them in a multi-year cycle of debt from which they have no

reasonable escape. Southern’s business model, including even their incentive-

compensation program for employees, is designed to induce their payment-stressed

borrowers to repeatedly refinance their loans and harvest a new round of fees with each

successive refinance. Southern derives approximately 40% of their net revenue through

this process of “churning” borrowers in repeated, fee-laden refinances.

3. Rather than ensure that their borrowers can successfully repay them on time,

Southern aims to identify borrowers who are struggling to repay their existing loan and

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thus need to refinance to avoid prolonged delinquency and default. Southern does this

because they generate more revenue by harvesting fees from frequent, payment-stressed

refinancers than from timely re-payers. To accomplish this, Southern employs an array of

harmful underwriting, sales, and servicing practices for their refinanced loans that are

designed to churn delinquent borrowers in continuous debt that they will struggle to ever

repay.

4. Southern’s underwriting process for refinanced loans aims to identify borrowers

who, as the company describes it, have exhibited a “propensity to refinance.” Southern

frequently refinances the loans of borrowers who are struggling to get out of debt and

must refinance their loans with Southern under payment stress, including numerous

borrowers for whom the total payments on their other debts exceed their meager monthly

incomes. When these borrowers predictably fall behind on their refinanced-loan

payments, Southern induces them to refinance again (and again, and again).

5. Southern does so by presenting delinquent borrowers with a Hobson’s choice:

either make last month’s payment and next month’s payment at the same time or

refinance to get current. Southern tilts the scales in favor of refinancing even more by

imposing late fees on borrowers who must make at least two monthly payments to get

current but waiving them for borrowers who refinance. And Southern complements these

policies by making clear to their employees that pressuring delinquent borrowers to

refinance is critical to the company’s profitability. Southern’s incentive-compensation

programs reward employees who are most effective at pressuring their customers to

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refinance their way out of delinquency, and the company regularly reprimands and

punishes employees who fail to hit the company’s refinance targets.

6. Southern tells borrowers who refinance under payment stress that refinancing is a

“fresh start” and “solution” to their problems. But for many of Southern’s borrowers,

refinancing merely prolongs and deepens those problems. And while the borrowers

suffer, Southern profits. Not surprisingly, then, the vast bulk of the active loans in

Southern’s portfolio are refinances of previous loans. And nearly 10,000 Southern

borrowers were in continuous, uninterrupted debt to the company over a seven-year

period from 2013 to 2020, because Southern repeatedly churned their short-term loans.

The Bureau brings this action to obtain relief for borrowers who were harmed by

Southern’s unfair and abusive loan-churning practices.

JURISDICTION AND LEGAL AUTHORITY

7. This court has subject-matter jurisdiction over this matter because it is brought

under “Federal consumer financial law,” 12 U.S.C. § 5565(a)(1), presents a federal

question, 28 U.S.C. § 1331, and is brought by an agency of the United States, 12 U.S.C.

§ 1345.

8. This Court has personal jurisdiction over Defendants because the causes of action

against Defendants arise from their conduct in this state. 12 U.S.C. § 5564(f).

9. Venue is proper here because Defendants are located and do business here. 12

U.S.C. § 5564(f).

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PARTIES

10. The Bureau is an independent agency of the United States created by the CFPA to

regulate the offering and provision of consumer-financial products and services under

federal consumer-financial laws. 12 U.S.C. § 5491(a). The Bureau has independent

litigating authority and is authorized to initiate civil actions in federal district court to

secure appropriate relief for violations of “Federal consumer financial law,” 12 U.S.C.

§ 5564, including the CFPA itself.

11. Under the CFPA, the Bureau has specific enforcement authority “to prevent a

covered person or service provider from committing or engaging in any unfair, deceptive,

or abusive act or practice under Federal law in connection with any transaction with a

consumer for a consumer financial product or service, or the offering of a consumer

financial product or service.” 12 U.S.C. § 5531(a).

12. Defendant Heights Finance Holding Co. f/k/a Southern Management Corporation

(Heights) is a consumer lender headquartered at 301 N. Main St., 23rd Floor, Greenville,

SC 29601. Heights is a wholly owned subsidiary of CURO Group Holdings—a publicly

traded consumer-finance company with lending operations throughout the United States

and Canada, whose 2022 revenue was $625.59M—and the parent company of the rest of

the Defendants identified below. At all times relevant hereto, Heights exercised complete

control over all of the subsidiaries identified below and directed all of their activities,

including their lending operations. Heights does business throughout the United States,

including in South Carolina, under a variety of trade names, including Covington Credit,

Quick Credit, Southern Finance, and Heights Finance.

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13. Defendant Covington Credit of Alabama, Inc. (Covington Alabama) is an

Alabama corporation and wholly owned subsidiary of Heights. Covington Alabama is

Heights’s principal license holder in Alabama, allowing its storefronts to conduct lending

operations within the state. Because Covington Alabama is a wholly owned subsidiary of

Heights and performs all of its activities and lending operations at Heights’s direction, it

shares a primary business location at 301 N. Main St., 23rd Floor, Greenville, SC 29601.

14. Defendant Southern Finance of Tennessee, Inc. (Southern Tennessee) is a

Tennessee corporation and wholly owned subsidiary of Heights. Southern Tennessee is

Heights’s principal license holder in Tennessee, allowing its storefronts to conduct

lending operations within the state. Because Southern Tennessee is a wholly owned

subsidiary of Heights and performs all of its activities and lending operations at Heights’s

direction, it shares a primary business location at 301 N. Main St., 23rd Floor, Greenville,

SC 29601.

15. Defendant Covington Credit of Georgia, Inc. (Covington Georgia) is a Georgia

corporation and wholly owned subsidiary of Heights. Covington Georgia is Heights’s

principal license holder in Georgia, allowing its storefronts to conduct lending operations

within the state. Because Covington Georgia is a wholly owned subsidiary of Heights and

performs all of its activities and lending operations at Heights’s direction, it shares a

primary business location at 301 N. Main St., 23rd Floor, Greenville, SC 29601.

16. Defendant Southern Finance of South Carolina, Inc. (Southern South Carolina) is

a South Carolina corporation and wholly owned subsidiary of Heights. Southern South

Carolina is one of Heights’s principal license holders in South Carolina, allowing its

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storefronts, namely its “Southern Finance” and “Covington Credit” storefronts, to

conduct lending operations within the state. Because Southern South Carolina is a wholly

owned subsidiary of Heights and performs all of its activities and lending operations at

Heights’s direction, it shares a primary business location at 301 N. Main St., 23rd Floor,

Greenville, SC 29601.

17. Defendant Quick Credit Corporation is a South Carolina corporation and wholly

owned subsidiary of Heights. Quick Credit Corp. is one of Heights’s principal license

holders in South Carolina, allowing its storefronts, namely its “Quick Credit” storefronts,

to conduct lending operations within the state. Because Quick Credit Corp. is a wholly

owned subsidiary of Heights and performs all of its activities and lending operations at

Heights’s direction, it shares a primary business location at 301 N. Main St., 23rd Floor,

Greenville, SC 29601.

18. Defendant Covington Credit of Texas, Inc. (Covington Texas) is a Texas

corporation and wholly owned subsidiary of Heights. Covington Texas is Heights’s

principal license holder in Texas, allowing its storefronts to conduct lending operations

within the state. Because Covington Texas is a wholly owned subsidiary of Heights and

performs all of its activities and lending operations at Heights’s direction, it shares a

primary business location at 301 N. Main St., 23rd Floor, Greenville, SC 29601.

19. Defendant Covington Credit, Inc. (Covington Oklahoma) is an Oklahoma

corporation and wholly owned subsidiary of Heights. Covington Oklahoma is Heights’s

principal license holder in Oklahoma, allowing its storefronts to conduct lending

operations within the state. Because Covington Oklahoma is a wholly owned subsidiary

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of Heights and performs all of its activities and lending operations at Heights’s direction,

it shares a primary business location at 301 N. Main St., 23rd Floor, Greenville, SC

29601.

20. Defendants are “covered persons” under the CFPA because they extend credit and

service loans to consumers. 12 U.S.C. § 5481(5), (6), (15)(A)(i).

STATEMENT OF FACTS

21. Southern makes high-cost installment loans to borrowers through a network of

over 250 brick-and-mortar storefronts located in the states of Texas, Oklahoma, Alabama,

Georgia, Tennessee, and South Carolina. Southern operates in these states via a variety of

subsidiaries, identified above, which it wholly owns, manages, and controls. Southern

operates in these states under a variety of trade names, including Covington Credit,

Southern Finance, Quick Credit, and, more recently, Heights Finance.

22. Southern’s installment loans have a median annual interest rate of 92%, a median

loan principal of $585, and are typically repayable in nine to eleven monthly installments.

The terms of Southern’s installment loans are non-negotiable and offered on a take-it-or-

leave-it basis.

23. As recently as 2019, Southern had annual gross loan receivables of over $250

million, and more than 70% of those receivables were attributable to refinanced loans. In

other words, the majority of loans in Southern’s portfolio are refinanced loans to existing

borrowers, many of whom have had to refinance their Southern loans numerous times

before.

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24. Refinancing as many their borrowers as possible—and as often as possible—is a

central component of Southern’s business model. Nearly 10% of Southern’s borrowers

refinance their loans with Southern a dozen times or more. But while these borrowers

make up just under 10% of Southern’s total customer base, their refinances generate 40%

of the company’s net revenue. In many of these instances, Southern pressures payment-

stressed borrowers to refinance to avoid prolonged delinquency or default. But this

reprieve is often only temporary: many payment-stressed borrowers end up in continuous

and costly refinancing sequences that span several years.

25. Southern’s borrowers who refinance under payment stress—that is, after becoming

14 or more days delinquent on their existing loan payments—are also more likely than

other refinancers to eventually default.

26. Southern’s borrowers are financially vulnerable:

a. Southern’s median borrower has an annual income of less than $25,000 and

impaired credit;

b. many of Southern’s borrowers are older Americans, who survive on fixed

incomes, such as Social Security;

c. many of Southern’s borrowers are single-parent wage earners, who struggle

to make ends meet every month for themselves and their families; and

d. many of Southern’s borrowers have monthly expenses, including payments

on other debts and for basic living expenses, that outstrip their incomes.

27. Southern refinances and harvests fees from these borrowers on unaffordable terms

because, by doing so, they can trap many of them in multi-year cycles of debt. Southern’s

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business model is built on generating an outsized proportion of their revenues from

churning the same borrowers in one refinanced loan after another.

28. Consequently, Southern uses an array of harmful underwriting, sales, and

servicing practices that are designed to create conditions under which refinancing, rather

than full and timely repayment, is more likely.

Southern’s credit-scoring model for refinanced loans prioritizes borrowers with a

“propensity to refinance,” including numerous borrowers who have

exhibited objective indicia of payment stress.

29. Southern uses a credit-applicant scoring method that enables loans to borrowers

who are likely to experience (or who have already exhibited) payment stress and who are

likely to repeatedly refinance their loans when they are struggling to repay them on time.

30. Until 2019, Southern used a manual applicant-scoring worksheet that scored

applicants in five different categories: residential stability, employment stability, time

living in the area, credit history, and free income (as defined by Southern, see infra ¶¶ 34-

36). The applicant’s cumulative score across these five categories was supposed to

determine whether, and how much, the applicant could borrow.

31. So, if the applicant scored highly enough in some categories, like residential

stability and time living in the area, that would be sufficient to overcome a lower score in

other categories, like free income.

32. As a result, from at least as early as 2013, Southern has refinanced the loans of

numerous borrowers who had:

a. calculated free incomes of less than $0 per month;

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b. an uninterrupted series of refinanced loans from Southern dating back for

the full five-year look-back period in their credit reports;

c. two or more loans outstanding from different Southern subsidiaries (e.g.,

Quick Credit and Covington Credit) at the same time;

d. multiple other loans from other high-cost installment lenders during the

same period; or

e. a series of open accounts from other creditors that were in serious

delinquency or collections.

33. Southern knew that these borrowers had more monthly bills to pay than they had

income to pay them. Southern also knew about these borrowers’ long histories of

refinancing. But these facts did not stop Southern from refinancing their loans again—

saddling them with monthly payments that either exceeded their calculated free incomes

of less than $0 per month, or were in excess of what they could reasonably afford to

repay, or both. Southern refinanced these loans because it predicted that if the borrowers

fell behind on their payments again, they could be expected to refinance their way out of

delinquency again.

34. Further, even if, per Southern’s manual scoring model, these applicants had

positive free monthly incomes, Southern calculated these figures without regard to the

applicants’ living expenses.

35. To calculate free income under their manual model, Southern subtracted from the

applicant’s monthly income only (a) the minimum payments that the applicant had to

make to stay current on other, recurring debts, and (b) any rent or mortgage payments

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that the applicant self-reported on their application. Crucially, this calculation did not

include the applicant’s necessary living expenses, including their expenditures for food,

transportation, healthcare, or childcare.

36. In this light, even many of Southern’s refinanced-loan applicants with positively

weighted “free incomes” in their credit-scoring worksheet were nevertheless likely to

have more expenses than income every month.

37. Southern’s borrowers who have more monthly expenses than monthly income

can’t reasonably afford to make timely payments on their Southern loans and thus are

very likely to experience payment stress.

38. Since 2019, Southern has shifted to an automated loan-decisioning model, which

they commissioned from a third-party developer that specializes in providing credit-

scoring solutions for small-dollar lenders like Southern.

39. This developer created two different models for Southern: one devoted to scoring

first-time loan applicants (the new customer model), and the other devoted to scoring

applicants for refinances (the existing customer model). Both models were developed

using historical loan-performance data from Southern’s portfolio to score applicants on

two principal components: (i) the likelihood that the loan would go “bad,” which was

defined as becoming 90 or more days delinquent; and (ii) the “propensity of the loan

applicant to refinance their loan.”

40. Southern requested that the developer include this second measurement because,

per the statement of work for the project, “[t]his analysis will identify those customers

most likely to refinance their loan multiple times in the future.”

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41. To develop this measurement, the developer analyzed over one million refinanced

loans in Southern’s portfolio and found that the factor with the greatest power to predict

future refinances was past refinances. In other words, each time a Southern borrower

refinanced their loan, they became even more likely to do so again in the future. As a

result, the automated loan-decisioning model that Southern currently uses weights an

applicant’s past, repeated refinancing as a positive attribute in refinanced-loan

applications.

42. Because Southern positively weights past, repeated refinancing in their refinance-

approval process, the company routinely lends to borrowers who have refinanced

multiple times in the past even if they clearly cannot afford to service their debt to

Southern without refinancing.

43. Because Southern routinely lends to borrowers with meager or negative free

incomes, and because their refinanced-loan-approval model prioritizes frequent

refinancers, rather than timely re-payers, many of Southern’s borrowers predictably have

trouble repaying and thus become delinquent.

Southern rewards employees who churn payment-stressed borrowers in fee-laden

refinances and punishes those who fail to meet the company’s refinance targets.

44. Once borrowers become 14 or more days past due on their payments, Southern

engages in a systematic effort to induce them to refinance their way out of delinquency

and avoid the negative consequences of defaulting.

45. Southern’s central office delivers weekly “14-day Contact Effectiveness Reports”

to the company’s regional and district managers, which are designed to help them

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monitor whether branches under their supervision have refinanced at least 33% of all

accounts that became 14 or more days delinquent, as Southern requires of its employees.

46. Southern’s branch-level employees bombard these payment-stressed borrowers

daily with solicitation letters, text messages, and repeated phone calls. Consistent with

Southern’s refinance training and employee-coaching materials, these communications

emphasize that, by refinancing, borrowers can: (i) obtain additional cash; (ii) pay off their

delinquent loan with the proceeds of their new loan; and (iii) improve their credit by

keeping the account open.

47. Consistent with Southern’s refinance training and employee-coaching materials,

these solicitations characterize refinanced loans as “fresh starts” and “solutions” for the

borrower’s payment stress and the “best option” to resolve the borrower’s delinquency.

48. But while these solicitations refer to refinanced loans as “fresh starts,” they do not

explain that a refinanced loan on the same price terms, which were already unaffordable

for the borrower, is merely extending the borrower’s debt term to Southern and

increasing their total cost of borrowing.

49. Similarly, while these solicitations refer to refinanced loans as “solutions” for the

borrower’s payment stress, they do not explain that refinancing under payment stress

once means that the borrower is even likelier to have to refinance (potentially many

times) under payment stress again in the future or default.

50. Similarly, while these solicitations refer to refinancing as the “best option” for

resolving the payment-stressed borrower’s delinquency, Southern’s servicing practices

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are designed to sharply limit the payment-stressed borrower’s available options so that

refinancing becomes the only reasonable option for getting out of their delinquency.

51. Southern’s training and employee-coaching materials make this fact explicit for

branch-level personnel. Emails from regional- and district-level supervisors instruct

Southern’s employees to give delinquent borrowers just two options, make all past-due

payments or refinance to get the loan current. For example:

a. “Team look at the accounts that are begging for help. They are past due and

are screaming they don’t have the money to pay you so get to work selling

them the benefits, if they don’t want to refi then ask for your money don’t

give an extra week or two don’t let it be their option!”

b. “Give them two options today: refinance up to date or pay up to date. There

are no other options. Everyone must come into the office today and bring

their account current!!”

c. “Managers make sure when calling past due customers with money we are

using the refi as a resolution, these people are already screaming at you

they don’t have the money to pay. Give them the only option to pay today

or refi up to date.”

d. “With three days left, we need to be creating a sense of urgency for every

collection customer to either refinance up to date or pay up to date. They

only have those two options.”

e. “They will have your money and we need to make sure we get them to do

the right thing. Either by paying, paying enough to refi or refinancing

without paying. Either way, it is YOUR call, not theirs if they are past due.”

52. These emails reflect a common understanding at Southern: borrowers who have

become 14 or more days delinquent simply do not have enough money to make their

payment, let alone the two or more payments that have become due. The only exception,

in ¶ 51(e) above, is from an email to employees following the delivery of Covid-era

stimulus checks to many of Southern’s payment-stressed borrowers.

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53. In this light, the two options that Southern presents to payment-stressed

borrowers—make two or more payments, or refinance, to get current—are really just one

option (refinance), and Southern knows this. Similar emails to Southern employees

reflect this fact:

a. “Let’s make sure we are working our past dues to the office to refi up to

date and our 14+ these people are begging us for money and they are

already running past due and don’t have any money.”

b. “They are already telling you they don’t have the money to pay you

because they are past due! Don’t take no for an answer on any customer

that has cash available and [is] past due! We cannot afford to miss any

opportunities of moving delinquency or refinancing a customer!”

54. Delinquent borrowers not having enough money to make their payment is a boon

for Southern because refinancing under payment stress is a central component of the

company’s business model and profitability.

55. Southern views full loan payoff as a negative outcome. During tax-refund season

and when Covid stimulus checks were sent to many of their customers, Southern emails

reflect the importance of keeping customers who want to get out of debt on the hook.

56. In a March 15, 2021 email, a district supervisor in Georgia makes this clear: “It is

crucial we focus and get the team in a mindset that as much [tax and covid-stimulus]

money is out there, your great customers will be trying to pay you and not refinance. This

is where the relationship you have built with them comes in handy. FLIP THAT LOAN!”

Another such email puts it succinctly: “When a customer has paid the loan down to just a

few payments, they start focusing on paying us out. We can combat that by refinancing

them now!”

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57. Refinancing delinquent borrowers and combatting loan payoffs are what drive

Southern’s loan-servicing and sales practices. And they accomplish this by sharply

limiting the reasonable alternatives to refinancing for borrowers who, as company

managers acknowledge, “don’t have the money” to make the payment on their Southern

loans and “are begging for help.”

58. One of the practices that Southern employs is to refuse partial payments or to

extend due dates for delinquent borrowers. For example, in a June 20, 2019 email, a

district supervisor in Alabama chides employees for allowing customers to remain past

due after making a partial payment because these payment-stressed borrowers are, in the

supervisor’s view, “the perfect customers to sell to”:

Team look over this. I want you to email me what happen on each account that

stayed past due after payment. Why aren’t you refinancing your accounts that are

running late. These are the perfect customers to sell to yet most of you didn’t sell

to any of them last week. Team I can tell you for a fact if your not getting these 14

day accounts current through refinancing your numbers will only get worse. It is

your job to sell loans and these are customers that should be the easiest to sell to.

You can’t have success in our business like this.

59. This policy against accepting partial payments or extending borrower due dates,

which company managers refer to by the shorthand “pay 2 or renew,” complements

Southern’s policy of waiving late fees on delinquent payments only if the customer has

agreed to refinance out of the delinquency.

60. Southern’s incentive-compensation programs reinforce these dynamics by

rewarding employees who are the most successful in inducing payment-stressed

borrowers to refinance. These programs make Southern’s sales and collections functions

explicitly interdependent.

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63. Similarly, in a November 8, 2019 email, a district supervisor who oversees stores

in Alabama and Georgia plainly tells their employees that if they don’t refinance their

delinquent customers, they’re not going to meet their monthly growth goals. The

supervisor is incredulous because only 14 of the 73 delinquent borrowers who were

eligible to refinance (meaning that they had at least $1 in available credit on their

account) did so:

Team if you do not refinance your past due customers you will not meet your

goals its that simple. Why are we not taking this serious? We took 124 +14pmts

and 73 of those were able to refi. Out of those 73 we only refinanced 14!!!!????

This is totally unacceptable. There is no way that 59 of our customers just refused

to refinance their acct. I know better than that team. So do you all. Good job

AL28. This is part of the reason right now that branch is @35.8% in refis, because

he refinanced his delinquent customers. Plain and simple. Starting today if you

have a +14 that is eligible to refi and anyone takes the payment without

refinancing the acct I need you to email me the acct # and name so I can look at it

BEFORE they leave the office or hang up the phone, put them on hold if you have

to, you waited for them 14+ days they can wait a few mins for you.

64. In addition to the refinance-pegged bonus program, Southern also has a bonus

program that’s tied to delinquency management. But in practice, the two programs are

merely flip sides of the same coin, because this program also encourages the use of

refinances to control delinquency rates.

65. For example, Southern segments delinquent loans into thirty-day bands and

assigns “buckets” to each band. Loans in bucket one are 1-30 days past due; loans in

bucket two are 31-60 days past due; and so on and so forth until the loans are 151-180

days past due, at which point they’re allocated to bucket six. To obtain the bonus for

managing delinquencies, branches must move a certain percentage of loans in each

bucket closer to current status each month.

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66. But because moving from one bucket to the next requires the collection of two or

more past-due payments, and because Southern’s delinquencies often arise because their

borrowers can’t afford to make even one payment, the quickest way for branches to bring

delinquent loans closer to current status is by refinancing them.

67. Southern’s training materials and incentive-program descriptions make this fact

explicit for employees. The company’s “Guide to Supplemental Income” instructs

employees to “always drive for the next refinance, since a refinance makes ALL buckets

current.” Other materials, including a presentation made at a June 2017 meeting of

Southern’s executive leadership, explain that “our focus when interacting with delinquent

customers has not changed,” and then lists refinancing as the top priority, ahead of even

collecting the full past-due balance on the loan.

68. Moreover, not only does Southern incentivize employees to refinance their

payment-stressed customers; it also punishes those who don’t. Numerous emails and

company training materials threaten employees with overtime shifts at night and on

weekends if they fail to meet the refinance and delinquency-management standards.

69. Southern also leverages a variety of coercive collections tactics to induce

payment-stressed borrowers to refinance.

70. Southern requires that all accounts that are 14 or more days past due be handled by

the branch manager. Southern closely monitors compliance with this requirement in store

audits.

71. Numerous audits refer to a store’s failure to “work” these borrowers into the

branch for a face-to-face conversation with the branch manager. They chide employees

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for failing to document how the delinquency has been resolved and for failing to

refinance the delinquent account.

72. Further, Southern takes a notional security interest in their borrowers’ household

goods or car by requiring them to pledge one or more pieces of their personal property as

loan collateral. But outside of a boilerplate attestation that Southern requires borrowers to

verify the existence—of the personal property pledged as collateral. Nor does Southern

rely on the stated value of the collateral in their loan-approval process. Southern also

never perfects their security interest in any of the collateral and only very rarely attempts

to repossess collateral if the borrower defaults, despite threatening to do so.

73. Of course, Southern’s borrowers don’t know that Southern is unlikely to come for

their personal property if they default on their loans. Borrowers who believe that they

stand to lose their personal property if they default are thus likely to either (a) skip

payments on other, unsecured debts or forgo basic living expenses, or (b) refinance their

way out of payment stress to gain a temporary reprieve from the underlying threat of

repossession. Southern uses these security interests not to legitimately preserve their

position in case a borrower defaults, but rather as leverage to induce borrowers to

refinance.

74. Finally, until the onset of the Covid pandemic, Southern also made in-person visits

to the homes of delinquent borrowers. Southern did this routinely to request that the

borrowers make multiple past-due payments on their account or, in the alternative, that

they refinance. These so-called “courtesy visits” were made even in cases where the

6:23-cv-04177-HMH Date Filed 08/22/23 Entry Number 1 Page 21 of 39

company had the borrower’s contact information and could reach the borrower over the

phone or with correspondence to a confirmed home address.

75. Southern pressured employees to make in-person visits to the homes of delinquent

borrowers to create a “sense of urgency.” As a February 21, 2020 email from a Southern

field director put it: “If your customers are avoiding you because they are waiting on

their tax refund, lets go out to their house today and remind them that we must get their

account current today regardless of whether they are waiting on their refund! Create a

sense of urgency!!”

76. Since terminating their in-person visits, Southern has started to enroll borrowers in

an autopay program, which grants the company access to their borrowers’ bank accounts.

Southern is thus able to draw money directly from payment-stressed borrowers’ bank

accounts when the borrowers can’t afford to make a timely payment on their loans.

Churning, or frequent refinancing, is central to Southern’s business model because

their loans are designed to harvest recurring, upfront fees; erode their borrowers’

available credit; and increase the company’s revenue with each successive refinance.

77. Southern’s installment loans carry an array of fees that increase the total cost of

borrowing each time a borrower refinances. Southern imposes three principal types of

fees in their loans: (i) upfront, non-refundable origination fees; (ii) precomputed interest

charges; and, where allowed by state law, (iii) insurance premiums.

78. The first type of fee—the upfront, non-refundable origination fee—may vary in

size or name by state, but they all share one crucial feature in common: Southern does not

refund any portion of the fee to borrowers who repay their loans early, as through

refinancing.

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79. Because refinancing entails taking out a new loan to pay off an existing loan,

Southern’s borrowers must pay origination fees every time they refinance their loans.

Thus, Southern can increase the revenue on their loans the more often they are

refinanced. By charging these origination fees on every new loan, Southern creates a

powerful incentive for the company to churn borrowers in repeated refinances as early

and as often as possible.

80. Southern creates a similar incentive for the company with their precomputed

interest and insurance-premium charges. Unlike with their origination fees, Southern is

legally required to refund any unearned portion of these charges if the borrower repays

their loan early by refinancing. But to do so, Southern uses an accounting method—the

so-called Rule of 78’s—that enables them to front-load a disproportionate share of the

charges to the earlier months in the repayment term.

81. For example, in a typical nine-month Southern loan, a borrower who refinances

after making three payments would be entitled to a refund of the unearned portion of

precomputed interest and insurance premiums. If Southern used an actuarial method to

calculate this refund, the borrower would receive a refund of approximately 66% of

unearned interest and insurance premiums. Under the Rule of 78’s, however, the

borrower only receives a refund of 46.66% of unearned interest and insurance premiums,

because the Rule allows Southern to front-load these charges. Southern’s use of the Rule

thus allows the company to extract a well-disguised prepayment penalty from borrowers

who refinance their loans before the maturity date.

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82. As with their reimposition of origination fees with every new loan, Southern’s

choice to use the Rule of 78’s also provides a powerful incentive for the company to

refinance their loans as early and as often as possible. This is so because the Rule enables

Southern to retain more of the precomputed interest and insurance premiums than they

have earned at any given point during the repayment term until the loan’s maturity date.

83. Southern makes this fact explicit for company leaders in internal documents, such

as the following slide from a 2017 meeting of the company’s executives:

84. Here, imposed over a watermark of $100 bills, is an “impact on business” example

in which Southern’s revenue increases in direct correlation to the frequency with which

their loans are refinanced. It compares Southern’s revenue across four different

repayment patterns: a loan that’s repaid on time over the full repayment term; a loan

that’s refinanced every five months; a loan that’s refinanced every four months; and a

6:23-cv-04177-HMH Date Filed 08/22/23 Entry Number 1 Page 24 of 39

loan that’s refinanced every three months. Consistent with Southern’s use of the Rule of

78’s, the “paid out” column reflects the dollar amount of what portion of the cumulative

precomputed interest (i.e., “deferred interest”) and upfront origination fee (i.e., “deferred

acquisition charge”) they have earned at each monthly stage of the repayment cycle. The

highlighted observations (which appear in the original document) show how a non-

refundable origination fee and front-loaded interest increase Southern’s revenue the more

frequently a loan is refinanced.

85. Southern’s increased revenue comes at their borrowers’ expense: borrowers who

frequently refinance their loans see their available credit steadily eroded with each

successive refinance.

86. This erosion of available credit (i.e., the amount of money that the borrower is

eligible to cash out when they refinance) is the upshot of Southern’s combined imposition

of upfront fees and front-loaded collection of unearned interest and insurance premiums.

Borrowers who refinance early in the repayment term have had a disproportionate share

of the payments made on their existing loan allocated to the payment of precomputed

interest and insurance premiums, rather than to the reduction of their principal obligation.

And the upfront fee that Southern imposes is taken off the top of whatever available

credit the borrower would otherwise have had at the time of refinancing.

87. As detailed in the following chart, which is drawn from over seven years of

Southern’s loan and payment data, Southern’s borrowers receive a steadily decreasing

amount of cash back with each successive refinance, even as their total amount financed

increases over time:

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Fig. 1

88. The red bar in Figure 1 represents the average amount financed in a Southern loan;

the blue bar represents the average amount of cash received by the borrower. The

borrower receives the most cash in loan 1, the borrower’s initial loan with Southern. But

as the borrower repeatedly refinances (i.e., loans 2-6, and so on), two trends become

apparent: (1) the amount financed steadily increases; and (2) the cash the borrower

receives steadily decreases. As a result of these two phenomena, Southern’s revenue will

steadily increase the more often that their borrowers refinance their loans. Indeed, as

recently as 2019, Southern earned more than $3 for every $1 that the company paid out

on all refinanced loans.

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89. Further, approximately 45% of the refinanced loans across Southern’s entire

portfolio were for cash disbursements to the borrower of less than the first payment due

on their refinanced loan—in many cases so low that they were just enough money to buy

a cup of coffee. Approximately 25% of Southern's loans that were refinanced to resolve a

delinquency during this period were for cash-out payments of $10 or less, and more than

10% of refinances to resolve delinquencies were for cash-out payments of less than $1.

90. Again, Southern instructs employees to pressure payment-stressed borrowers to

refinance, even when doing so would result in a minimal cash benefit. As a typical June

2019 email from a company field director put it: “Lead your collection calls today with a

solicit of the cash available, even if they only have $3 available. Refinances are the most

important driver of your business!!” Another such email instructs employees: “Looking

at the accounts that are in the negative cash available, tell the customers all they have to

pay is to get them $0.01 available, then they can refinance!!”

91. These paltry cash disbursements confirm that many Southern borrowers use early-

term refinances to obtain fleeting relief from unaffordable payments, and to avoid

prolonged delinquency and default, rather than as a source of meaningful liquidity to

weather an emergency hardship. This is especially true of the nearly 10,000 borrowers

who were in continuous, uninterrupted debt to Southern from 2013 to at least 2020.

92. Southern’s business model is clear: put payment-stressed borrowers in

unaffordable refinances; when they fall behind on their payments, refinance them again

and again; with each refinance, front-load the collection of unearned interest and

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insurance premiums while harvesting a new round of upfront fees; and repeat this cycle

for as long as possible.

CFPA VIOLATIONS

93. The CFPA grants the Bureau authority to bring civil actions to seek legal and

equitable relief for violations of the Act. 12 U.S.C. § 5564(a).

94. The CFPA prohibits covered persons or service providers from engaging in

deceptive, unfair, or abusive acts or practices in connection with offering or providing a

consumer-financial product or service. 12 U.S.C. §§ 5531(a), 5481(6)(A).

95. Defendants are “covered persons” under the Act because they extend credit and

services loans to consumers. 12 U.S.C. §§ 5481(5), (15)(A)(i).

COUNT I

UNFAIR PRACTICES

Southern’s practice of churning payment-stressed borrowers

in fee-laden refinances is unfair.

96. The Bureau realleges and incorporates by reference paragraphs 1-92.

97. An act or practice is unfair under the CFPA if it “causes or is likely to cause

substantial injury to consumers which is not reasonably avoidable by consumers” and

“such substantial injury is not outweighed by countervailing benefits to consumers or to

competition.” 12 U.S.C. § 5531(c)(1).

98. Southern’s practice of churning payment-stressed borrowers in costly refinances is

unfair. Southern’s loan-churning practices collectively include:

a. underwriting refinanced loans to prioritize borrowers with a “propensity to

refinance,” even when borrowers have exhibited objective indicia of

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payment stress (e.g., delinquencies of 14 days or more) that demonstrated

their inability to repay their existing loans;

b. touting refinances on similar terms as “fresh starts,” “solutions,” and “best

options” for payment-stressed borrowers despite their exhibiting objective

indicia of payment stress while struggling to repay their existing loans;

c. limiting the reasonable alternatives to refinancing for payment-stressed

borrowers once they have fallen behind on their payments;

d. using an incentive-compensation scheme that rewards employees who

induce payment-stressed borrowers into repeatedly refinancing their loans

while punishing employees who fail to meet the company’s refinance

standards;

e. taking notional security interests in payment-stressed borrowers’ household

goods or vehicle and threatening repossession of collateral as leverage to

induce payment-stressed borrowers to refinance; and

f. making in-person visits to the homes of payment-stressed borrowers and

using collections calls to solicit refinances while emphasizing the negative

consequences of prolonged delinquency and default.

99. Payment-stressed borrowers whom Southern churns in costly refinances suffer

substantial injury through Southern’s repeated imposition of upfront fees and front-

loading of their collection of unearned interest and insurance premiums, which steadily

erodes borrowers’ available credit and makes it harder for them to pay off their loans.

6:23-cv-04177-HMH Date Filed 08/22/23 Entry Number 1 Page 29 of 39

100. Payment-stressed borrowers whom Southern churns in costly refinances suffer

substantial injury because refinancing increases the length of their indebtedness and their

total cost of borrowing without meaningfully reducing their risk of eventual default in the

future.

101. Payment-stressed borrowers whom Southern churns in costly refinances also

suffer substantial injury when they must undertake harmful default-avoidance measures.

That is, while each successive refinance may enable payment-stressed borrowers to pay

some other debts or pay for some basic living expenses, Southern’s practices steadily

erode the borrowers’ available credit and increase the likelihood that they will have to

defer or forgo payment on other debts and for basic living expenses to repay their

Southern loans in full. This is especially the case given Southern’s reimposition of

upfront origination fees at each successive refinance.

102. Southern’s borrowers cannot reasonably avoid the substantial injury from repeated

refinancing under payment stress that is caused or is likely to be caused by Southern’s

churning practices. This injury is not reasonably avoidable because payment-stressed

borrowers’ only means to avoid it are by defaulting or undertaking costly default-

avoidance measures. An injury is not reasonably avoidable if the only means to avoid it

would impose their own substantial harms.

103. Alternatively, this injury is not reasonably avoidable because payment-stressed

borrowers cannot reasonably anticipate how the repeated imposition of upfront fees and

front-loaded collection of unearned interest erodes their available credit with each

successive refinance. These borrowers cannot reasonably avoid injury that they cannot

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reasonably anticipate. Once Southern’s payment-stressed borrowers fall behind on their

loan payments, they have no reasonable alternatives other than refinancing to become

current on their loan payments. This is so because: (a) these borrowers are a financially

vulnerable population for whom credit access is already scarce; (b) Southern refuses to

accept partial payments, modify repayment terms, or otherwise extend borrowers’ due

dates; and (c) these borrowers cannot afford to make two or more payments to get

current.

104. Further, Southern’s payment-stressed borrowers cannot reasonably avoid the

injury from repeated refinancing by remaining delinquent, because prolonged

delinquency creates a cascading series of negative consequences, including Southern’s

imposition of late fees, negative credit reporting, in-person visits to the borrowers’

homes, and threats to repossess collateral or file collections lawsuits.

105. Nor is the unavoidable injury from repeated refinancing under payment stress

outweighed by countervailing benefits to consumers or to competition. Although

payment-stressed borrowers may theoretically benefit from delaying default and from the

ability to skip an upcoming payment by refinancing, those benefits are outweighed by the

cumulative injury from the long-term indebtedness and associated costs caused by

Southern’s churning of borrowers in costly refinances. The repeated imposition of

upfront fees and front-loaded collection of unearned interest and insurance premiums

steadily erodes borrowers’ available credit with each successive refinance, many times

resulting in small cash disbursements. And, ultimately, many of Southern’s borrowers

who refinance under payment stress eventually default or undertake costly default-

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avoidance measures (or both) anyway—but not before Southern has harvested several

new rounds of fees with each successive refinance.

106. Southern therefore engaged in unfair acts or practices that violated §§ 1031(c) and

1036(a)(1)(B) of the CFPA. 12 U.S.C. §§ 5531(c), 5536(a)(1)(B).

COUNT II

ABUSIVE PRACTICES

Southern’s practice of churning payment-stressed borrowers in fee-laden refinances is

abusive because it takes unreasonable advantage of borrowers’ lack of understanding

of the material risks, costs, or conditions of repeatedly refinancing.

107. The Bureau realleges and incorporates by reference paragraphs 1-92.

108. An act or practice is abusive under the CFPA if it “takes unreasonable advantage

of a lack of understanding on the part of the consumer of the material risks, costs, or

conditions of a consumer financial product or service.” 12 U.S.C. § 5531(d)(2)(A).

Southern’s practice of churning payment-stressed borrowers in costly refinances satisfies

each element of this prong of abusiveness.

Southern’s payment-stressed borrowers lack an understanding of the material risks,

costs, or conditions of a fee-laden refinanced Southern loan.

109. Many of Southern’s borrowers lack an understanding of the material risks, costs,

or conditions of refinancing a Southern loan under payment stress. Specifically, many of

Southern’s payment-stressed borrowers lack an understanding that:

a. by refinancing, they are prolonging their time in debt by taking out a new

loan on terms that they have a demonstrated inability to repay;

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b. by refinancing, they are paying another upfront origination fee, which

Southern immediately recoups, and paying more in cumulative pre-

computed interest and insurance premiums;

c. by refinancing, they are paying another upfront origination fee and more in

cumulative pre-computed interest and insurance premiums, which

diminishes the amount of cash back they can receive with each successive

refinance, even as their total amount borrowed remains constant or

increases; and

d. by refinancing once, they become more likely to refinance again and incur a

high risk of eventual default, which compounds the harms that result from

repeated refinancing.

Southern takes unreasonable advantage of payment-stressed borrowers’

lack of understanding.

110. Southern takes unreasonable advantage of payment-stressed borrowers’ lack of

understanding by exploiting and profiting from their asymmetric access to information

about the material risks, costs, or conditions of a refinanced Southern loan.

111. Southern’s credit-scoring model enables them to identify and prioritize those of

their borrowers who have a demonstrated “propensity to refinance” their loans despite

exhibiting objective indicia of payment stress.

112. Southern understands that many of the borrowers who take out the company’s

nine-month installment loans will fall behind on their payments and will have no

reasonable alternatives to refinancing to resolve their delinquency and avoid default.

6:23-cv-04177-HMH Date Filed 08/22/23 Entry Number 1 Page 33 of 39

113. Southern understands that by not accepting partial payments, extending payment

due dates, or otherwise modifying loan terms to make them more affordable, the

company will force payment-stressed borrowers to refinance to avoid prolonged

delinquency or defaulting.

114. Southern understands that borrowers who are forced to refinance under payment

stress to avoid prolonged delinquency and default will, in many instances, incur long-

term debts to the company that vastly exceed the nine-month repayment terms that they

originally signed up for. Southern understands the inevitable result of these practices, as

many of Southern’s borrowers are in continuous, uninterrupted debt to the company for

several years.

115. Southern understands that their profitability hinges on their ability to keep

payment-stressed borrowers in continuous debt, rather than on enabling them to repay

their loans according to their disclosed terms. Southern understands that by keeping

borrowers in continuous debt, they can harvest a new round of upfront fees with each

successive refinance. And Southern understands that their interest in keeping borrowers

in continuous debt is misaligned with their borrowers’ interest in full and timely

repayment of their Southern loans.

116. By marketing refinances as solutions, fresh starts, and best options for payment-

stressed borrowers, Southern takes unreasonable advantage of payment-stressed

borrowers’ lack of understanding that refinancing on the same unaffordable and non-

negotiable terms serves only to prolong their time in debt and total cost of borrowing and

does not offer a long-term solution to their inability to repay their current loan.

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117. By harvesting upfront fees and front-loading their collection of unearned interest

and insurance premiums each time payment-stressed borrowers refinance, Southern takes

unreasonable advantage of payment-stressed borrowers’ lack of understanding of how

repeatedly refinancing on Southern’s terms erodes their available credit, increases their

total cost of borrowing, and increases the difficulty of eventually paying off their debt to

Southern.

118. By sharply limiting the reasonable alternatives to refinancing that payment-

stressed borrowers have to avoid prolonged delinquency and default, Southern takes

unreasonable advantage of payment-stressed borrowers’ lack of understanding of how

likely they are to become trapped in a cycle of debt to Southern after they have fallen

behind on their loan payments.

119. By churning payment-stressed borrowers in costly refinances to avoid prolonged

delinquency and default, making lending decisions that are driven by the goal of keeping

borrowers in debt, then profiting from payment-stressed borrowers’ failure to repay their

loans according to their terms, Southern takes unreasonable advantage of payment-

stressed borrowers’ lack of understanding of the material risks, costs, and conditions of

repeatedly refinancing with Southern.

120. Southern therefore engaged in abusive acts or practices that violated

§§ 1031(d)(2)(A) and 1036(a)(1)(B) of the CFPA. 12 U.S.C. §§ 5531(d)(2)(A),

5536(a)(1)(B).

6:23-cv-04177-HMH Date Filed 08/22/23 Entry Number 1 Page 35 of 39

COUNT III

ABUSIVE PRACTICES

Southern’s practice of churning payment-stressed borrowers in fee-laden refinances is

abusive because it takes unreasonable advantage of borrowers’ inability to protect their

interests in selecting or using a refinanced loan.

121. The Bureau realleges and incorporates by reference paragraphs 1-92.

122. An act or practice is abusive under the CFPA if it “takes unreasonable advantage

of the inability of the consumer to protect the interests of the consumer in selecting or

using a consumer financial product or service.” 12 U.S.C. § 5531(d)(2)(B).

123. Southern’s practice of churning payment-stressed borrowers in costly refinances

satisfies each element of this prong of abusiveness.

Southern’s payment-stressed borrowers cannot protect their interests in

selecting or using a refinanced Southern loan.

124. Southern’s payment-stressed borrowers’ interests in selecting or using a

refinanced loan include: (a) meeting their immediate cash needs, (b) repaying their loan

according to its terms without needing to repeatedly re-borrow or undertake costly

default-avoidance measures, and (c) mitigating their risk of eventual default.

125. Once they are in an unaffordable loan, Southern’s payment-stressed borrowers

lack an ability to protect their interests in selecting or using a refinanced loan. Once they

become legally obligated to repay a loan that they can’t reasonably afford, Southern’s

payment-stressed borrowers face imminent harms from prolonged delinquency and

default. To avoid these imminent harms, Southern’s payment-stressed borrowers have

limited options, all of which impose harms of their own.

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126. To come up with two or more unaffordable payments, these borrowers likely must

either borrow from another high-cost lender that caters to this credit-constrained

borrower population, or undertake harmful default-avoidance measures, such as deferring

or forgoing payment on other debts and for basic living expenses.

Southern takes unreasonable advantage of the inability of their

payment-stressed borrowers to protect their interests.

127. Southern takes unreasonable advantage of payment-stressed borrowers’ inability

to protect their interests by making them refinanced loans that they can’t reasonably

afford to repay and then servicing the loans in a way that limits their reasonable

alternatives to refinancing under payment stress again in the future.

128. Southern takes unreasonable advantage of these refinancing borrowers by

harvesting upfront fees and front-loading their collection of unearned interest and

insurance premiums with each successive refinance. These practices erode the borrowers’

available credit, impose a well-disguised prepayment penalty, prolong the borrowers’

time in debt, and increase the borrowers’ total cost of borrowing.

129. Southern therefore engaged in abusive acts or practices that violated

§§ 1031(d)(2)(B) and 1036(a)(1)(B) of the CFPA. 12 U.S.C. §§ 5531(d)(2)(B),

5536(a)(1)(B).

PRAYER FOR RELIEF

The Bureau thus requests that the Court:

a. permanently enjoin Defendants from committing future violations of the

CFPA, 12 U.S.C. §§ 5531, 5536;

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b. award such relief as the Court finds necessary to redress injury to

consumers resulting from Defendants’ violations of the CFPA, including

but not limited to rescission or reformation of contracts, refund of moneys

paid, restitution, disgorgement or compensation for unjust enrichment, and

payment of damages;

c. impose a civil money penalty against Defendants;

d. order Defendants to pay the Bureau’s costs incurred in connection with

prosecuting this action; and

e. award additional relief as the Court may deem just and proper.

Respectfully submitted,

Eric Halperin

Enforcement Director

Cara Petersen

Principal Deputy Enforcement Director

Alusheyi J. Wheeler

Deputy Enforcement Director

Kara Miller

Assistant Litigation Deputy

/s/ David Hendricks

John Thompson (NM Bar No. 139788)

Motion for Admission Pro Hac Vice

forthcoming

Gregory W. Jones (IL Bar No. 6313157)

Motion for Admission Pro Hac Vice

forthcoming

David Hendricks (SC Bar No. 10547)

Enforcement Attorneys

Consumer Financial Protection Bureau

1700 G Street, NW

Washington, DC 20552

202-435-7270 (Thompson)

202-573-1372 (Jones)

312-610-8967 (Hendricks)

Fax: 703-642-4585

john.thompson@cfpb.gov

6:23-cv-04177-HMH Date Filed 08/22/23 Entry Number 1 Page 38 of 39

gregory.jones@cfpb.gov

david.hendricks@cfpb.gov

Attorneys for the Consumer Financial

Protection Bureau

6:23-cv-04177-HMH Date Filed 08/22/23 Entry Number 1 Page 39 of 39