Health and Science

Medical lenders fined after charging interest of as much as 55%

The sky-high interest rates on these medical loans would make you sick.

Four financing companies that were charging New York consumers up to a whopping 55 percent interest rate for loans to finance elective medical and surgical procedures have agreed to pay more than 300 borrowers about $230,000 to settle claims they were violating the Empire State's usury laws, officials said Wednesday.

The four lenders, who were not licensed to finance those types of loans in the state, also agreed to lower the interest rate on the loans to no higher than 16 percent—New York's legal maximum for unlicensed lenders, officials said.

By law, the interest rates charged by licensed lenders in New York cannot exceed 25 percent.

But "many of the RIOs [retail installment obligations] were financed at annual percentage rates in excess of of New York's usury laws; some APRs were as high as 55 percent," according to a statement issued by the office of state Attorney General Eric Schneiderman, which announced the deal.

"Sales finance and other loan companies that bypass our state's licensing and usury laws and target New York consumers will be held accountable," Schneiderman said. "This behavior is particularly egregious when it targets vulnerable consumers seeking medical treatment with high-interest loans."

Oxford | iStock | Getty Images

The companies who agreed to pay the settlement to 317 people were, a California entity which did business as; another California company named Duvera Billing Services; Colorado-based Highlands Premier Acceptance and Paramount Capital Group, which is based in Pennsylvania, according to Schneiderman's office.

In addition to the $230,000 in repayments or credits they agreed to pay, the companies also will collectively pay $35,000 in penalties.

Read MoreStates made 'little progress' in health, Duvera Billing and Highlands Premier did not respond to CNBC's requests for comment.

Paramount Capital, in a statement released Thursday, said that it had from 2009 to 2013 purchased retail installment contracts from MyMedicalloan and because that company "is a California corporation . . .we understood our licensing requirements to be regulated by California, not the State of New York."

"Upon receiving notice from the New York Health Care Bureau of their investigation, we immediately pledged our full and complete cooperation with the New York attorney general and today's settlement agreement, which includes minor penalties for Paramount, is a reflection of that cooperation," Paramount said. "We want our customers to know that no APR exceeded 17.99 percent on the contracts we purchased from [MyMedicalloan] We have already reduced that rate to 16 percent and will make retroactive interest refund payments to all affected borrowers well within the 90-day agreement reached with the New York attorney general."

"Furthermore, Paramount will be contacting each affected borrower individually to explain the mistake, offer our sincere apology for this oversight, and to notify them of the interest due each of them."

The case was spurred by a complaint filed with the attorney general's office in 2012, by a 50-year-old mental health counselor from Yonkers, N.Y., named Karen Brandon, official said.

Brandon told CNBC that in 2011 she had financed a tummy tuck procedure with a loan she arranged after first contacting the online broker, which had been recommended to her by the office of the doctor she expected to perform the operation.

She said she signed an agreement to borrow a total of $8,000—and paid another $3,000 directly to the doctor who ended up doing the tummy tuck. A month after her surgery, in April 2011, the lender began taking $365 in monthly repayments directly from her bank account, as agreed, Brandon said.

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But more than a year later, after having paid a total of $5,600 on the loan so far, Brandon contacted the lender to notify them that she wanted to pay off what she owed, because she was obtaining another loan from her bank for that purpose.

An employee of the lender then claimed that she now owed a total of $19,000 in principal and interest because she had borrowed $12,000—not the $8,000 that was stated on her loan agreement, Brandon recalled.

Karen Brandon
Source: Karen Brandon

"I told him, 'I'm not paying this,' and I said, 'I"m going to contact my attorney,' and I hung up," she said. "I was extremely angry, afraid and didn't know what to do, or how to respond. My initial thought was not to go through this chaos."

Brandon said she considered just paying what the lender had demanded, but "my sister said, 'Hell no! That's what they're counting on you to do.'"

Brandon eventually contacted Schneiderman's office. Her complaint led investigators there to discover the broker had been dealing with other lenders who were making financing retail installment obligations for medical and surgical procedures in excess of New York's legal interest rate maximums, officials said.

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That probe led to the settlement announced Wednesday.

Brandon said she was "happy" that the companies' practices were exposed by her complaint, and "more happy that other people will not have to go through ... what they put me through."

But she also called the companies' conduct "a disgrace."

"Enough people don't know" of their rights, she said, and "enough people won't fight for themselves because it's too much. Emotionally and physically, it's just too much."

—By CNBC's Dan Mangan.