Many unsavory businesses are taking root in the sordid belly of the Internet, including some particularly unscrupulous payday lenders who use high fees and shady methods to empty borrowers’ offline bank accounts. This month, the State Department for Business Oversight 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.
Advocates of payday loans say they are an important last resort option for Californians with cash flow problems and bad credit, even though they can be more expensive than conventional credit cards or bank loans. . The way they usually work is for storefront lenders to 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 require 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 fees up to $ 45 – and prohibits lenders from giving clients a second loan before they have paid off the first.
State law applies its lending rules and licensing requirements to any entity that does business here, regardless of where it is based. Nonetheless, many out-of-state online lenders (some of whom are headquartered in offshore tax havens) have flouted these demands, as have others who have partnered with Indian tribes. The unscrupulous levy outrageous fees or dairy borrowers’ accounts for fees and interest for months, extracting far more than state law allows.
Now California is trying to cut off the access of unlicensed lenders to the bank accounts of its residents. Business Supervision Commissioner Jan Lynn Owen sent a letter Oct. 7 to all state-licensed banks and credit unions, warning them that they may violate or facilitate a violation of federal law and state, as well as 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 redouble their efforts to identify and exclude other unlicensed lenders.
Similar efforts are underway in New York and other states, putting pressure on operators of electronic transaction clearinghouses that banks rely on to stop serving law-breaking payday lenders. . It’s probably a much more successful approach than trying to crack down on sites that may shut down and restart under a new name or in a new location overnight – or that try to protect themselves with claims of tribal sovereignty. The online payday loan industry is growing rapidly, accounting for more than 38% of the nearly $ 50 billion payday loans in 2012, according to one estimate. It is essential that consumers who turn to these lenders have at least as much protection as they would if they borrowed from the corner store.