The ‘Wild West’ of Shady Online Payday Lenders
For short-lived consumers, turning to an online payday lender may seem like a smart move. But the industry is plagued by abusive practices, with sky-high interest rates just the tip of the problematic iceberg, according to a new report from Pew Charitable Trusts.
While some might think the problem is limited to low-income Americans, the study found that more than half of consumers turning to online payday lenders were making more than $ 30,000, and one-third had an income. greater than $ 50,000. In comparison, in-store payday lenders attract most of their customers to households earning less than $ 30,000.
The issues typically center on online payday lenders who are not licensed to provide loans in all of the states they operate in, according to the study, which based its findings on focus groups, investigations, complaints. of consumers, business returns and lender expenses. on advertising and lead generation.
While online payday lenders operate much the same as their in-store counterparts – by lending money that borrowers will theoretically pay off on their next payday – there are a few key differences, Pew found. Online lenders gain electronic access to borrowers’ checking accounts, which can lead to unauthorized withdrawals and other problems, while their annual percentage rate averages 652%, or well above the already 391%. high charged by payday lenders, according to the study. .
On top of that, a third of online payday loan borrowers said they were threatened by a lender or debt collector. Lenders have sometimes threatened to contact the police to arrest borrowers, which is illegal under the Fair Debt Collection Practices Act.
“There were borrowers in the focus groups who said they thought they might lose their jobs because lenders called their workplace and threatened to fire them,” Alex Horowitz told CBS MoneyWatch, researcher on the Pew project. “There could be real property damage here.”
So why are these lenders unregulated or their abuse stopped? Some states have taken legal action against abusive lenders. But Horowitz notes that it is often difficult for states to regulate online operations, given that they are sometimes incorporated offshore or claim affiliation with a Native American tribe.
“It has been very difficult for state actors,” such as state attorneys general, to regulate online payday lenders, Horowitz said. “This indicates the importance of federal action. The Bureau of Consumer Financial Protection has a historic opportunity to do so.”
The payday loan industry attracted the attention of CFPB, with the federal agency last November asking consumers to file abuse complaints. In May, the agency said it was considering “whether rule-making is warranted” for payday loans.
An online payday lender was charged in August by the Manhattan District Attorney’s Office, which alleged companies controlled by a Tennessee businessman were violating state limits on interest rates. Loans offered in New York have a 25% cap rate, but the indictment accused the companies of setting annual interest rates at around 650%.
But skyrocketing interest rates are just the beginning of the problems, according to the Pew study. About 46% of online borrowers said lenders made withdrawals that exceeded their checking accounts, roughly double the percentage of in-store borrowers. A third said an unauthorized withdrawal was made on an online payday loan, while one in five online borrowers said they closed a bank account or had their bank closed one in as part of an online loan.
“It is important to recognize that these problems are repeated and widespread,” said Horowitz. “If products fail with most of their borrowers, there is a symptom of a product problem.”