Saturday, August 10, 2013
Payday lenders have operated below the radar for years. Not anymore. These days at least 7 state and federal agencies are scrutinizing payday lenders, especially those making loans via the Internet.
Payday lenders have been flocking to the Internet for the past several years to sidestep state and local restrictions on their activities. Earlier this year federal bank regulators told banks and credit unions to think twice before getting into bed with payday lenders, especially those that skirt the law. Soon after, the regulators warned banks and credit unions that they would be scrutinizing deposit advance lending in future supervisory exams. Deposit advances are a micro-loan product offered by banks and credit unions that look and act pretty much like payday loans. (See previous stories here and here.)
Now New York State's lead financial services regulator, federal bank and credit union regulators, plus the Consumer Financial Protection Bureau(CFPB), the Department of Justice and several states attorneys general are cracking down on payday lenders, especially those operating online.
Benjamin M. Lawsky, New York State Superintendent of Financial Services, earlier this week issued warnings 35 payday lenders to stop doing business in the state (virtually or in person). And he ordered debt collectors to stop collecting bad debts tied to these lenders unless they can confirm the loans were not made a usurious interest rates.
Lawsky also sent letters to 117 banks, and NACHA, requesting that they work with the state to cut off access to consumer accounts by "illegal payday lenders." (NACHA writes and enforces rules for the ACH, an electronic payment network most commonly used to disburse and collect these payday loans.)
Payday loans are illegal in New York. Lenders workaround state restrictions by taking their businesses online. Some also operate out of Indian Reservations, which are exempt from state laws. "Nonetheless, Internet payday lending is just as unlawful as payday lending made in person in New York," the state said in an August 6 press release. The state usury limit in New York is 25%. An investigation by the state, however, revealed that some New Yorkers are repaying these loans at annual interest rates as high as 1,095%!!!
Treasury, Justice & CFPB
There is little in the way of federal law that addresses payday lending head on; only a prohibition against payday or car-title loans to active members of the military, which Congress tucked into an appropriations bill back in 2006.
Last year, the CFPB held a series of field hearings let it be known that it was closely watching payday lenders who operated online, with an eye toward regulations. It also published a white paper containing initial findings of its analysis of the market. Among those findings: the median payday loan is for $350 is 14-days in length and costs about $50 in interest fees, which translates to an APR of about 322%.
The Center for Public Integrity reports that the CFPB and the Justice Department have sent civil subpoenas to "dozens of financial companies, many of which are located on Indian reservations to avoid the reach of federal consumer protection laws." State and federal bank regulators and several states attorneys general also are involved in the investigation, as well as the Financial Fraud Enforcement Task Force, a Presidential crime-stopping commission.
The Center for Public Integrity is a non-profit research and public watchdog organization based in Washington."The government is using a range of tools - anti-money laundering laws, routine oversight of banks' books, subpoenas and state laws - that could snuff out an entire category of lenders [online] who contend they are operating lawfully," the Center wrote in an article published August 8. That article quoted anonymous government and industry officials.
Stay tuned for more developments in these evolving investigations.