Payday lenders move online as regulators crack down



The banner ad at the top of the website features a wide-eyed baby cradled in the hands of an adult with the words, “Did this special vacation for two end up producing a third?” Castle Payday covers the unexpected expenses of life.

On a growing number of sites like this, short term loans are just a click away for borrowers surfing the web, regardless of a history of bankruptcy, bad checks, or other credit issues.

The catch is that these payday loans often come with exorbitant interest rates of 400% or more. The Castle Payday website advertises an effective annual percentage rate of 888, which means that a 14-day loan of $ 500 will ultimately cost the borrower $ 675.

Those who cannot muster the cash to repay the loans along with their other bills may be tempted to take out another short-term loan to cover the first one, potentially dragging them into a cycle of debt.

Consumer advocates are complaining that companies like Castle Payday are taking to the internet to avoid some state laws that restrict or ban traditional in-store payday lending.

“More states are cracking down on payday loans and it’s much easier to hide online than it is to hide in a storefront,” said Ed Mierzwinski, consumer program director for US PIRG, a group defense of rights.

But industry groups argue that online payday loans are legal and provide a vital service to millions of struggling Americans with few credit options.

“Most consumers don’t have the option of getting $ 500 or $ 600 in an emergency through their banks or credit unions,” said Peter Barden, spokesperson for Online Lenders. Alliance, a commercial organization. “Credit card limits have been reduced, equity loans have been reduced, so more and more people are turning to alternative financial services companies for short-term credit. And like any other industry right now, they’re looking online.

Payday loans are illegal in 15 states, including North Carolina, Georgia, and Pennsylvania. Nine others – including Washington and Florida – allow payday loans but have strict rules that limit fees, require longer repayment periods or restrict the number of loans per client, according to a study by Pew Charitable Trust.

In recent months, state and federal regulators have stepped up pressure on banks to stop working with online lenders. But the industry is defending itself in court.

The legal situation is complicated by the fact that many online lending websites are run by Native American tribes, who claim that their sovereign status means that they are not subject to state laws. Castle Payday, for example, is operated by the Old Desert Lake Band of the Chippewa Indians of Lake Superior in Michigan.

Le Lac Vieux joined another tribe this month in seeking an injunction against a New York regulator, arguing that states have no authority over them.

Benjamin Lawsky, New York’s superintendent of financial services, had sent cease and desist orders to Castle Payday and 34 other online lenders to prevent them from granting payday loans to consumers in New York, where the payday loans are illegal. Lawsky also asked more than 100 banks to deny lenders access to the automated system used to process electronic payments, so that they could not debit borrowers’ accounts.

In a lawsuit filed in US district court, Old Lake and the Otoe-Missouria tribe of Oklahoma condemn what they describe as a “bare-handed attack” by regulators on tribal sovereignty. If not stopped, the prosecution warns, New York’s “campaign of misrepresentation, threats and coercion” will destroy tribal businesses and devastate tribal economies.

Tribes in poor and isolated areas need the proceeds of online loans to fund their governments and essential services – from education programs to new fire trucks, said Barry Brandon, executive director of Native American Financial Services. Association, an advocacy group for the tribes involved. in the online lending industry.

“We have had reports from some of our member tribes that the income they generate from their online lending operations is now between 25 and 50 percent of the tribal budget,” he said.

Brandon acknowledges that there are bad players in the online lending industry – including some companies that falsely claim to be affiliated with tribes – but he says most tribal businesses operate responsibly and under federal law.

Unfortunately, non-Indian online lenders often claim tribal sovereignty in situations where their tribal ties are loose at best, said Uriah King, vice president of state policy at the Center for Responsible Lending in Durham, in North Carolina.

“When we scratch the surface, they don’t look like tribal moneylenders,” King said. “They look like bogus relationships that benefit the lenders, not the tribe.”

In a high-profile case, the payday loan operation AMG Services Inc. in Overland Park, Kan., Claimed to be from the Miami and Modoc tribes of Oklahoma and the Santee Sioux of Nebraska, but the tribes reportedly did not receive only one or two percent of the income from each loan.

The real benefactor was believed to have been racing driver Scott Tucker, who used $ 40 million raised from borrowers to sponsor his racing team, according to a complaint filed last year by the Federal Trade Commission. Sovereign immunity for tribes is a very serious issue, but it shouldn’t be used as a fig leaf for predatory loans, King said.

“At the end of the day, a payday loan is an unwanted product that makes people more indebted, and it doesn’t matter if it’s a bank, a non-bank organization or a tribe, the reality is that it’s just not a good product and it doesn’t matter who supplies it, ”he said.

Consumers should also be wary of fake online payday loan websites designed to steal their names, social security numbers and banking information, he said.

An Illinois federal judge last week ordered one of these operations in Tampa, Florida to suspend operations after a Federal Trade Commission investigation.

The FTC accused defendants Sean Mulrooney and Odafe Ogaga of using websites with names like Vantage Funding, Ideal Advance and Your Loan Funding to debit consumers’ checking accounts without their permission. Tens of thousands of clients have lost over $ 5 million because of the program.

Mulrooney and Ogaga allegedly used the scam to finance luxury lifestyles, with luxury cars – Mulrooney owned a Maserati GranTurismo, while Ogaga owned a Rolls-Royce Ghost and a Ferrari, according to court documents.

“You have absolutely no idea who you’re dealing with when you take out a loan online and agree to let someone get their hands on your bank account,” said Mierzwinski, consumer advocate with US PIRG. “Please take a step back and think: is there any other way to get this money to pay my bills?” Because once you get into high cost payday loans, whether online or in person, it’s not something you do once. It is usually something that you do over and over and over again.

This story was originally published September 9, 2013 00:00.


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