Online Payday Lending Skirts State Regulations

Online payday lending has become a growing business and a growing concern. Online payday lending has more than doubled from $5.8 billion in 2006 to $13 billion in 2011. A recent article in the New York Times outlines two ways the online payday loan industry is engaging in predatory lending: skirting state interest rate caps and collaboration with big banks for direct payment withdrawals.

Many states have regulations to cap the interest rates on loans, from 17% APR in Arkansas to 400% APR in Illinois. Unfortunately, online payday lenders are issuing loans at significantly higher interest rates than those allowable by state regulations. Interest rates of up to1,564% from online payday lenders have been uncovered, most recently in Minnesota through a lawsuit by Attorney General Lori Swanson. This is because the location of the lender rather than that of the borrower determines the effective interest rate regulations. Here in Illinois, Attorney General Lisa Madigan is currently investigating online lending activity, but as many online lenders have set up shop overseas for “lawsuit protection and tax reduction,” tracking them down for illegal lending can be difficult.

The 120% rise of online payday lending over the past five or more years is at least partially attributed to the cooperation of major banks like JP Morgan Chase, Wells Fargo, and Bank of America, all mentioned in the NYT article. By allowing lenders to directly withdraw payments from borrowers’ accounts, sometimes against their wishes, the big banks are reaping hefty rewards in the form of overdraft, insufficient funds, and service fees. According to a report by Pew Charitable Trusts, over a quarter of all payday loan borrowers have had their accounts overdrawn due to payday loans.

The article highlighted the story of Ivy Brodsky who tried to close her Chase account to stop six payday lenders from taking money from her account. Chase refused her request and kept her account open for more than one month, allowing the lenders to withdraw money 55 times. Those 55 withdrawals led to 44 insufficient fund, overdraft, and service fees totaling $1,523 in charges from Chase. Despite statements from some bank representatives that they work to stop collections when their clients request it, there is an inherent financial incentive to collaborate with online payday lenders since aggressive collections often result in a bounty of fees for the banks.

People will always need quick access to small cash loans, but high interest rates devastate low and moderate income communities. Our Alternative Small Dollar Loan (ASDL) Toolkit is an comprehensive resource for banks and credit unions to create a Small Dollar Loan program. A companion to the ASDL Toolkit, our Profitability Calculator is a fantastic tool for financial institutions to create a Small Dollar Loan customized to their institution’s portfolio that is both sustainable and financially safe for their communities.

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