For strapped consumers, turning to an online payday lender may seem like a smart move. But the industry is beset with abusive practices, with sky-high interest rates just the tip of the problematic iceberg, according to a new report from the Pew Charitable Trusts.
While some might think that the issue is limited to low-income Americans, the study found that more than half of the consumers turning to online payday lenders earned more than $30,000, and one-third have income of more than $50,000. By comparison, storefront payday lenders draw most of their customers from households earning less than $30,000.
The problems are typically centered around online payday lenders that aren't licensed to make loans in all the states where they operate, according to the study, which based its findings on focus groups, surveys, consumer complaints, company filings, and lenders' spending on advertising and lead generation.
While online payday lenders at heart operate similarly to their storefront counterparts -- lending money that borrowers will, theoretically, pay back on their next payday -- there are some 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 percent, or far higher than the already sky-high 391 percent charged by storefront payday lenders, the study found.
On top of that, one-third of online payday loan borrowers reported being threatened by a lender or debt collector. Lenders sometimes threatened to contact police to have the borrowers arrested, which is illegal under the Fair Debt Collection Practices Act.
"There were borrowers in the focus groups who reported they thought they might lose their jobs because lenders were calling their workplace and threatening to get them fired," Alex Horowitz, a research officer on the Pew project, told CBS MoneyWatch. "There could be real material harms here."
So why aren't these lenders regulated, or their abuses stopped? Some states have pursued action against abusive lenders. But Horowitz notes that it's often difficult for states to regulate the online operations, given they are sometimes incorporated offshore or claim an affiliation with a Native American tribe.
"It's been very difficult for the state actors," such as state attorney generals, to regulate the online payday lenders, Horowitz said. "That indicates the importance of federal action. The Consumer Financial Protection Bureau has a historic opportunity to do that."
The payday loan industry has attracted the attention of the CFPB, with the federal agency last November asking consumers to submit complaints about abuses. In May, the agency said it was considering "whether rulemaking is warranted" for payday loans.
One online payday lender was indicted in August by the Manhattan district attorney's office, which alleged that businesses controlled by a Tennessee businessman was breaking the state's limits on interest rates. Loans offered in New York have a rate cap of 25 percent, but the indictment charged that the businesses were setting annual interest rates at about 650 percent.
But sky-high interest rates are only the start of the problems, according to the Pew study. About 46 percent of online borrowers said lenders made withdrawals that overdrew their checking accounts, about twice the percentage of storefront borrowers. One-third said an unauthorized withdrawal was made in connection with an online payday loan, while one out of five online borrowers said they had closed a bank account or had one closed by their bank in connection with an online loan.
"It's important to recognize these problems are repeated and widespread," Horowitz said. "If products are failing most of their borrowers, there's a symptom of a product problem."