Payday loans, online style
Many unsavory ventures make their home in the seamy underbelly of the Internet, including some particularly unscrupulous payday lenders that use high fees and shady methods to drain borrowers’ offline bank accounts. This month, the state Department of Business Oversight took an important step to protect Californians from such predators by warning banks and credit unions not to process transactions from unlicensed online lenders. It was the latest in a growing number of moves by state and federal regulators to weed out the worst purveyors of a risky form of credit.
Advocates of payday loans say they’re an important last-resort option for Californians with cash-flow problems and poor credit ratings, even though they can be costlier than credit cards or conventional bank loans. The way they usually work is that storefront lenders have borrowers write them a postdated check for a loan plus the fees. The checks are cashed two weeks later, presumably after the borrower’s next paycheck. Online lenders do it differently: They have borrowers grant them electronic access to their bank accounts, allowing the lenders to transfer money in and out. The state has a relatively low limit on payday loans — no more than $300, including up to $45 in fees — and forbids lenders to give customers a second loan before they’ve paid off the first one.
State law applies its lending rules and licensing requirements to any entity that does business here, regardless of where it’s based. Nevertheless, numerous out-of-state online lenders (some headquartered in offshore tax havens) have flouted those requirements, as have others that have partnered with Indian tribes. The unprincipled ones impose outrageous charges or milk borrowers’ accounts for fees and interest for months, extracting far more than state law allows.
Now California is trying to cut off unlicensed lenders’ access to its residents’ bank accounts. Commissioner of Business Oversight Jan Lynn Owen sent a letter on Oct. 7 to all state-licensed banks and credit unions, warning them that they could be violating or facilitating a violation of state and federal law, as well as raising concerns about their safety and soundness, by allowing electronic transactions with unlicensed online lenders. She asked them to stop doing business with 16 specific online payday operations and to beef up their efforts to identify and cut off other unlicensed lenders.
Similar efforts are under way in New York and other states, putting pressure on operators of the electronic transaction clearinghouses that banks rely on to stop serving payday lenders that flout the law. That’s likely to be a much more fruitful approach than trying to crack down on sites that can shut down and start up again under a new name or in a new location overnight — or that try to shield themselves with claims of tribal sovereignty. The online payday loan business is growing fast, accounting for more than 38% of the nearly $50 billion in payday loans in 2012, by one estimate. It’s crucial that consumers who turn to those lenders have as least as much protection as they would if they borrowed at the store on the corner.
