Websites that offer short-term, high-interest loans to consumers continue to draw the attention of regulators, with New York state authorities issuing 16 subpoenas to lead generation websites recently, according to the New York Times.
The relatively new practice of offering payday loans online through websites involves a thicket of complicated legal issues.
Many states have made certain kinds of short-term loans illegal, pushing lenders online, where they can try to act beyond the reach of state authorities. Also, some of those lenders also are affiliated with Native American tribes, and claim they are not subject to U.S. federal consumer protection laws.
State and federal officials have countered these steps by acting to cut off online payday lenders’ access to consumers’ traditional bank accounts, which are easier to regulate. In most cases, payday lenders receive payments by tapping directly into consumers’ checking accounts.
Critics of payday loans say many consumers get trapped in cycles of repeatedly taking out new loans to repay the old, effectively being hit with 300%- 1,000% interest rates. Supporters say short-term loans provide access to cash for a set of consumers who can’t easily borrow from the traditional lending industry, and don’t have credit cards.
New York officials who want to stop state residents from acquiring payday loans online — payday stores are illegal in the state — are now targeting “lead generation” websites that promise to help consumers get hundreds of dollars deposited into their checking accounts within minutes. The 16 subpoenas from financial regulator Benjamin Lawsky were sent to websites sites that act as middle-men, collecting consumers’ personal information and passing it on to lenders for a commission. They seek information on the lenders the online lead generators work with, the Times reported.
Legal Issues Abound
There’s been a flurry of legal action surrounding payday loans in recent months.
In September, South Dakota-based Western Sky lending suspended operations after what it calls “unwarranted overreach by state regulators,” including New York. Western Sky, once a fixture in late-night television advertising, said it had to lay off 94 employees in its Cheyenne River Indian Reservation operation after state regulators pressured banks to stop working with them, “choking off business with online lenders like Western Sky.”
The Consumer Financial Protection Bureau announced its first payday loan enforcement action Nov. 20, with Cash America International reimbursing 14,000 consumers up to $14 million for robo-signing practices connected to debt collection lawsuits.
This summer, the Federal Trade Commission won a finding from a federal judge in Nevada that reservation-based payday lenders are not exempt from U.S. consumer protection law — specifically, the FTC Act, the Truth in Lending Act, and the Electronic Fund Transfer Act.
Meanwhile, the Online Lenders Alliance (OLA), a trade group that represents the industry, has argued that its loans are legal, and traditional banks should not cut off their access to electronic payments. The OLA also said in a statement via spokesman Peter Barden that the group strives to make sure lead generation doesn’t run afoul of the law.
“OLA has strict advertising and marketing best practices for members who offer lead generation for lenders,” Barden said. “They require that consumer data be protected and shared only in compliance with applicable laws.”