After decades of operating as wardens of modern-day debtors’ prisons, the reign of payday lenders may soon be over.
Since the spring, the Consumer Financial Protection Bureau has been working on a set of rules that could for the first time impose nationwide regulations on the payday lending industry as a whole. Meanwhile, state regulators have redoubled their efforts to crack down on the growing predatory practices of payday lenders as they increasingly move from traditional neighborhood strip malls to the Internet.
The anti-payday lending movement hit the mainstream this week. Consumer advocacy group National People’s Action hijacked Discovery Channel’s “Shark Week” campaign, swapping out the killer fish for predatory payday lenders. And in a 16-minute segment on the HBO show “Last Week Tonight” on Sunday, host John Oliver (with an assist from comedian Sarah Silverman) begged Americans to “literally do anything else” but take out payday loans.
“Basically, payday loan companies are the Lay’s potato chips of finance,” he said. “You can’t have just one and they’re terrible for you.”
Shtick aside, Oliver has the right idea.
Payday loans are typically doled out in small amounts — an average of $430, according to the Pew Charitable Trusts — that are due in 14 days. All would be fine if borrowers could manage to pay the loans back in that amount of time, but most often they can’t.
That’s when things get expensive. A whopping four out of five payday loans are rolled over into new loans within 14 days, and one out of five new payday loans end up costing the borrower more than the amount borrowed, according to the CFPB.
In states that don’t cap payday loan interest rates, lenders are free to charge as high as 400% interest on unpaid loans, not to mention the fees they charge borrowers to extend their loan’s due date.
And when borrowers can’t pay, lenders can resort to aggressive tactics to recoup the money: they’ve been known to harass borrowers at work (illegal), take the money directly out of their bank accounts without notice (also illegal), and threaten to have them arrested (spoiler alert: illegal).
Online payday lenders are booming
While bricks-and-mortar payday lending revenue has remained flat over the last four years, revenue from online lenders has more than doubled, from just over $1.5 billion in 2006 to more than $4 billion in 2013, according to a report by research firm Stephens, Inc. Internet sales made up 38% of all payday loans in 2012, according to a study by the Milken Institute.
Online payday lenders don’t differ much from their storefront peers, but borrowing from lenders online can put consumers at greater risk of identity theft and bank fraud, says Nick Bourke, director of the small dollar loans project at the Pew Charitable Trusts.
Some fake payday lending websites, called “lead generators,” pose as middlemen and ask borrowers to fork over their Social Security and bank account number in exchange for finding them a lender that will issue them a low-cost loan. But once a borrower’s personal information is collected, the loan may or not be forthcoming.
Some of the growth in online lending stems from stricter regulations imposed by states on the fees they can charge borrowers. The most nefarious payday lenders charge upwards of 390% interest on loans, rates that are allowed in states like Tennessee and Texas.
Arizona and Montana were among a handful of states to recently cap interest rates on payday loans at 36%, while New York is one of the only states to impose a 16% rate limit. They joined 22 other states, including Georgia, New Hampshire and Vermont, which have imposed interest rate caps or restricted payday lending altogether (excluding banks and credit unions). As a result, payday lending storefronts in these states have all but disappeared, Pew found.
Through advertising, however, the most determined lenders are still able to target consumers in states where the practice is banned or restricted, which is technically legal.
“The online proliferation [of payday lenders] is a product of these companies being able to hide their behavior by virtue of being online in a way that a traditional bricks-and-mortar business that has a street face and signage cannot,” says Kathleen McGee, chief of the New York State Attorney General’s Internet Bureau.
In January, McGee’s office fined Western Sky, a Timber Lake, S.D.-based payday lender, for allegedly duping New York consumers into taking out online loans with interest rates many times higher than the state allows. The company used late-night TV ads to attract new clients.
Illinois Attorney General Lisa Madigan sued four out-of-state online-based lenders for allegedly charging borrowers fees that were twice as high as allowed in the state. The companies charged customers $30 for every $100 borrowed, Madigan claims. McGee says investigators rely a lot on consumers to tip them off to unscrupulous lenders, but they also do their own web searches to sniff them out.
And on Monday in New York, prosecutors indicted a Tennessee man and a dozen payday lending businesses he owns over claims that he used the Internet to skirt state laws, as first reported in the New York Times. The indictment claims Carey Vaughn Brown set up a payday lending website, MyCashNow.com, in the West Indies to avoid detection by American regulators.
According to the indictment, filed by New York District Attorney Cyrus B. Vance, Brown allegedly set up other companies in different states that handled various arms of the lending process — one to originate the loans, one to dole out the money to borrowers, another to collect payments, and so on. Brown’s attorney, Paul Shechtman, issued a statement to Yahoo Finance saying he “acted in good faith and will be proven innocent.”
How to protect yourself
In his payday loan takedown, Oliver had solid advice for consumers: “If you’re thinking about getting a payday loan, pick up the phone, then put it down and do literally anything else.”
“Anything else” could be applying for a small loan from a credit union, or even using a low-interest credit card. Ask friends or family for a small loan. According to Pew, nearly 70% of payday loan borrowers turn to these loans to pay for a recurring expense like a utility bill, mortgage or credit card payment. You will be much better off calling your landlord, cable company or credit card issuer upfront and telling them about your situation, than getting a payday loan. They may be willing to work with you on a payment plan you can afford.
If you’re being harassed by a payday lender, contact your state attorney general’s office or the CFPB to file a complaint. And here’s a rundown from the FTC of exactly what strategies payday lenders are and are not legally allowed to use to collect their loans.
If this isn't enough to convince you to steer clear of payday lenders, then we highly suggest you do absolutely anything else — including checking out Oliver's hilarious PSA:
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