Online Payday Lenders & Credit Crunch

man walks into a payday lending business Wednesday, Feb. 1, 2006, in Tacoma, Wash. Last year the Legislature enacted law that banned payday lenders from contacting the boss of a military borrower to collect an overdue payment. This year, under Senate bills sponsored by Sen. Darlene Fairley, D-Lake Forest Park, the military is seeking to cap annual interest at 36 percent, limit borrowers to one $500 obligation at a time, and prohibit a lender from giving loans to a borrower's spouse. (AP Photo/Karie Hamilton)[ AP Photo/Karie Hamilton

CBS News Investigative Unit's Lauren Zelt wrote this story for CBSNews.com.

As Wall Street is reeling from years of easy credit it couldn't afford, online payday lenders are targeting Americans on Main Street with easy credit options that can leave consumers swimming in new debt.

One new ad for Ezpaydaycash boasts, "With the recent credit crunch, traditional banking institutions have ignored your needs."

"In the last week I've started seeing more online payday lenders urging people that payday loans are the solution," says Jean Ann Fox of the Consumer Federation of America.

Complaints are widespread. CBS News has learned that Attorneys General in at least fourteen states have received complaints about online payday lenders in the past year. Consumers say some lenders make illegal automatic bank withdrawals after loans are paid off and harass borrowers.

The $5 billion a year online lending industry is lucrative. Cash America, a payday advance storefront company, attributes a $160 million bump in last year's revenue to acquiring online lender CashNetUSA.com according to SEC filings.

In order to get a loan, customers fill out an application giving lenders access to personal information, including their social security number and routing and bank account numbers. After being cleared for the loan, the lender deposits the payday advance. The entire process usually takes less than 5 or 10 minutes. Then at the end of the borrower's pay period, the lender dips directly into the customer's bank account to pay off the loan.

Faced with a recent divorce and car trouble, Filbrun got her first loan from a local storefront payday lender. "I didn't have enough money to pay it back on my payday so I went and got another loan," said borrower Christine Filbrun.

When Filbrun later received an email advertisement for online payday loans, she thought it would be an even better option. "It seemed so easy. There was no credit check and they would not check with my employer," she said.

After getting the $300 loan, the company withdrew money from her bank account every other week. "Since that time, an ACH withdrawal of $90 has been deducted twice per month," Filbrun said. "I have paid the loan almost three times over."

"Sometimes companies take out more than they're supposed to," said Dan Egan of the Pennsylvania Department of Banking.

"This is the first we've heard of such actions," said the executive director of the Online Lenders Alliance (OLA), Cole Kimball.

"If the OLA board of directors ever became aware of any OLA member who knowingly and willfully engaged in theft, we would report that company to the appropriate law-enforcement authorities immediately," Kimball told CBS News in an email. However it's unclear which online lenders abide by OLA regulations, because Kimball will not reveal who belongs to the alliance.

Many consumers don't know how to stop the bank account debits because they have a difficult time finding contact information for lenders who operate overseas or on Indian reservations.

"Lenders get a hold of customer bank accounts and just won't let go," said Laura Udis from the office. She says the state has tracked down companies in Malta and Grenada. With lenders overseas it's unclear which laws apply.

It's the same problem in Florida says Michael Ramfden of the Florida Office of Financial Regulation. "The reality is that you're dealing with a nameless, faceless company. It could take a trained investigator weeks or months to find them."

As a result, online lenders can navigate around the payday loan laws that are designed to protect consumers, including state interest rate caps that effectively ban lenders from doing business in certain states.

Some customers get stuck in a cycle of debt and end up taking out an increasing number of loans that they can't afford.

"One of [the borrowers] who complained to us had loans with at least 30 different payday lenders," says Norman Googel, an assistant attorney general in West Virginia.

Federal regulations require US lenders to publish their annual percentage rate for interest charged on a payday advance. Sites like PaydayYes.com charge from 438% to 1,369% interest, amounts that overwhelmingly exceed interest rate caps on short term loans in some states.

In West Virginia, the Attorney General has filed lawsuits to enforce investigative subpoenas issued to more than thirty companies that run online payday lending websites such as PaydayYES.com, QuikPayday.com, CashDirectExpress.com and CashAdvanceUSA.com, which have not been settled to date.

Consumers like Filbrun encourage others to avoid online payday advance all together. "I would so highly advise against it," she said, "I just feel exploited by it," she said.
By Lauren Zelt
  • Laura Strickler

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