State regulators’ recent cease orders to a handful of payday lenders and one licensed debt collector who were making and collecting on illegal loans in Massachusetts has highlighted some of the intricacies regulators will undoubtedly face as they crack down on predatory lending practices in the future.
Late last month, the Division of Banks and Office of Consumer Affairs issued cease orders to five unlicensed Internet-based payday lenders who sold loans to Massachusetts consumers, as well as a licensed debt collector, Nevada-based Delbert Services Corp., which allegedly collaborated with a network of predatory lenders.
The division named those lenders as Cash Call and its subsidiary WS Funding, GP Investors, Novea Resource Management, and Western Sky Financial.
Peter Barden, the director of communications and operations for the Online Lenders Alliance, a trade association that represents more than 125 online lenders, said none of the companies involved here are members of the organization.
The investigation kicked into gear with an examination of Delbert Services, Commissioner of Banks David Cotney said. That tipped the agencies off to Cash Call and WS Funding, both owned by the same person as Delbert, John P. Reddam.
Payday lending, once largely the province of proprietors operating out of neon-lit storefronts dotting strip malls, is moving online, and that poses unique challenges for state and federal regulators looking to shut down predatory lending.
While Massachusetts regulators have nabbed more than 150 payday lenders in the past four years, enforcing sanctions against arguably unscrupulous Internet-based lenders is difficult.
“It’s like Whac-a-Mole, trying to shut these places down,” Cotney remarked.
According to Cotney, the sham operations, those that tend to be most strongly implicated in cases of fraud and identity theft, often operate offshore and sometimes will respond to cease orders by apparently shuttering their business, only to re-open under a new name.
Other online payday lenders, which Cotney characterized as a little more mainstream, might respond by posting a message on their website telling visitors they do not offer loans to Massachusetts consumers.
In a recent white paper on payday lending and deposit advance products, the Consumer Financial Protection Bureau (CFPB) acknowledges the rise of online payday lending, although online payday loans still constitute a minority of the total loan volume.
Payday lending is not explicitly illegal in Massachusetts. Rather, these small-dollar, high-interest rate loans run afoul of the state’s small loan law, which requires any business making a loan under $6,000 with an interest rate of more than 12 percent to obtain a license and to also abide by the 23 percent rate cap.
That statute dates back to the early 20th century and was intended to address loan sharking, Cotney explained. He added, “Quite frankly, it’s very relevant today.”
And this instance with Cash Call and company would seem to bear that out: the loan amounts ranged from $850 to $5,075, annual interest rates ranged from 59 to 169 percent, and some came with origination fees as high as $500.
In addition to the cease orders, those lenders are also required to refund all interest, finance charges and fees collected from Massachusetts consumers on those illegal loans.
Fast Cash
While some major banks offer their own version of a payday loan, called deposit advances, banks are generally governed by a different set of laws than payday lenders, and deposit advance products are rare, if not totally absent, in the commonwealth.
Payday loans, whether conducted in cyber space or face-to-face, promise fast access to funds and very limited underwriting, and they’re marketed as a means to cover unexpected financial shortfalls – an emergency medical expense, for example.
Therein lies the irony: Though these loans are intended to bridge a short gap, steep interest rates and fees often make it impossible for customers to pay down the full amount from the next paycheck, and consequently, loans are rolled over again and again, pushing borrowers into a never-ending debt cycle.
Barden said the fact that people turn to online payday loans demonstrates a need for a product not currently available in Massachusetts.
“The Online Lenders Alliance believes consumers should have access to the financial products they’re demanding and are advocating a federal solution,” he told Banker & Tradesman by email.
Specifically, the OLA is supporting H.R. 1566, the Consumer Credit Access, Innovation, and Modernization Act, which would create a federal charter for Internet consumer credit corporations.
That bill, however, is still pending before the House Financial Services committee.
In the meantime, state and federal regulators are playing a virtual game of Whac-A-Mole, hitting unscrupulous lenders with cease orders and waiting for the next one to pop up.
Email: lalix@thewarrengroup.com
