Many unsavory companies are settling into the sleazy underbelly of the internet, including some particularly unscrupulous payday lenders who use high fees and shady methods to drain borrowers’ offline bank accounts. This month, the state Department of Business Surveillance took an important step to protect Californians from these 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 providers of a risky form of credit.
Proponents of payday loans say they are an important last-resort option for Californians with cash flow problems and poor credit, even though they can be more expensive than credit cards or conventional bank loans. . The way they usually work is that storefront lenders ask borrowers to write them a post-dated check for a loan plus fees. Checks are cashed two weeks later, presumably after the borrower’s next paycheck. Online lenders do it differently: they ask borrowers to grant them electronic access to their bank accounts, which allows 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 prohibits lenders from giving customers a second loan until they’ve paid off the first.
State law applies its lending rules and licensing requirements to any entity doing business here, regardless of its headquarters. Nonetheless, many out-of-state online lenders (some headquartered in offshore tax havens) flouted these requirements, as did others who partnered with Indian tribes. The unscrupulous charge exorbitant fees or milk borrower accounts for fees and interest for months, extract much more than state law permits.
Now, California is trying to cut off unauthorized lenders from accessing its residents’ bank accounts. Business Surveillance Commissioner Jan Lynn Owen sent a letter October 7 to all state-licensed banks and credit unions, warning them that they may violate or facilitate a violation of federal and state law, as well as raise concerns about their safety and soundness , allowing electronic transactions with unlicensed online lenders . She asked them to stop doing business with 16 specific online payday operations and to step up their efforts to identify and cut off other unlicensed lenders.
Similar efforts are underway in New York and other states, pressuring operators of electronic transaction clearinghouses that banks rely on to stop serving payday lenders who flout the law. . This is probably a much more fruitful approach than trying to clamp down on sites that can shut down and restart under a new name or in a new location overnight – or that try to protect themselves with tribal sovereignty claims. The online payday loan industry is growing rapidly, accounting for more than 38% of the nearly $50 billion in payday loans in 2012, in an estimation. It is crucial that consumers who turn to these lenders have at least as much protection as they would if borrowing from the corner store.