More than 40 payday loan ads were posted on the local Boston craigslist Web site last week, including one that leads to the Web page of Credit.com (pictured above), which brokers payday loans for several lenders. The state Division of Banks says payday lending is prohibited in Massachusetts and plans to take action against violators.
Need quick cash? A few keystrokes on the popular craigslist Web site’s Boston page (www.boston.craigslist.org) will lead people in need of small loans right into the clutches of illegal payday lenders.
The Massachusetts Division of Banks plans to issue cease-and-desist orders to the online violators or take other actions it deems appropriate, said David Cotney, senior deputy commission of banks. The DOB was informed of the payday lending advertisements posted on the local craigslist site by Banker & Tradesman on Monday last week. More than 40 listings for payday loan services were posted at the site. At that time, the DOB began working on a plan of action. Notices to stop activity are expected to go out soon to the companies, according to Cotney.
Payday loans are small cash advances typically in amounts between $100 and $1,000 that allow borrowers to receive money now and pay it back with their next paycheck. Most online payday lending requires the borrower to have direct deposit and allow the lender electronic access to the borrower’s bank account.
Although not technically outlawed in Massachusetts, payday lenders still need to follow the local rules, says the DOB. Companies can receive a small-loan license to issue loans under $6,000 with an annual interest rate above 12 percent. Licensed companies still need to follow a 23 percent annual interest rate cap and are not allowed to charge more than a $20 fee per year. None of the companies posting on craigslist’s classified pages are licensed and the terms of their loans violate state law. In fact, according to the DOB, there are currently are no payday lenders licensed to ply their trade in Massachusetts.
It is not the first time the DOB has taken action against Internet payday lenders violating local laws and regulations. And the DOB has found that some of the posters on craigslist are repeat offenders.
“We have gone through the list. Several of [these companies] we did send cease letters to last year,” said Cotney.
In February 2005, the DOB issued 91 cease-activity orders to online payday loan outlets marketing to Massachusetts consumers. Another five companies were sent certified letters to stop offering payday loans to Massachusetts residents in May 2005.
According to the DOB, 61 of the companies that had been sent letters in the past either have complied by posting disclaimers on their Web sites or have gone out of business.
The sweep had been considered a big step forward in protecting consumers and fighting Internet payday loan companies conducting business in the state. However, not all of the letters sent last year were received by the payday lenders in question due to fake or overseas addresses, said Cotney, who added that such inaccessibility is even greater cause for concern.
“We have a law that gives us the tools to go after these people,” said Cotney. “Other states don’t have laws that allow them to go after companies that broker payday loans.”
Payday lending is prohibited by specific laws or usury caps in 12 states, including Massachusetts. In the Bay State, the practice is prohibited under the Small Loan Act, which, although not referencing payday loans specifically, caps annual interest rates and fees to levels well below those charged by payday lenders.
Emily Davidson, a member of the Corporate Communications Department for San Francisco-based Credit.com, said there are ways around state laws designed to keep payday lending in check.
Credit.com is one of the 40-plus payday lending conduits that were advertising on the Boston craigslist page last week, although Davidson said a third party had posted its ad.
Credit.com works as a brokering service, matching customers with a handful of lenders who provide different financial products, including payday loans. Customers can fill out an application on the Credit.com Web site and the company will review the application and work to get it approved by one of its affiliated lenders.
“This is all part of a battle between state attorneys general and the payday lending industry,” said Davidson. “We have had limited access to certain states [with tough laws]. I doubt that Massachusetts would be one. There is no state where [issuing payday loans] is impossible.”
Davidson named Alaska, Georgia, Kansas, New York and Washington, D.C., as the most difficult places to complete payday loan transactions. She said Massachusetts was an “open” state, since there are not any specific laws prohibiting payday lending.
According to the Credit.com Web site, “Massachusetts does not have specific payday lending legislation and permits payday lenders to operate and charge any interest rate or fees that the borrower agrees to pay.”
Local regulators say that statement is inaccurate, but even when local laws exist, it doesn’t necessarily stop payday loan activity.
“Even if it is prohibited there are ways [payday lenders] can work around it very sneakily,” Davidson said. One such tactic is renting a charter from a local bank as a means of piggybacking access to local consumers.
However, Cotney said that such arrangements do not give payday lenders legal authority to do business in the Bay State.
Davidson said it is the responsibility of the companies Credit.com works with to make sure they are licensed and following state regulations.
Clint Powell, customer service manager for craigslist, said people are prohibited from posting illegal ads. Posters agree to not post anything illegal under the terms and conditions of the site. Although posts occasionally are pulled from the site, Powell said it is harder to spot illegal postings of services that are allowed in one state and banned in another.
“Obviously, we don’t want any advertisement on our service that’s not legal,” said Powell. “When this sort of thing is brought to our attention, we work closely with law enforcement or regulators to do what we can.”
‘Debt Traps’
Although Credit.com does provide customers access to payday lenders, Davidson said such loans are not always an appropriate choice for consumers. The Credit.com Web site post warnings to consumers about some of the dangers inherent in payday loans, including additional, costly fees if the loan is not paid back on time.
“It’s just a sad fact that so many people have to rely on them [payday loans],” Davidson said. “Millions of people are using payday loans all the time,” she said. “You can’t think about payday loans the same way you think about other loans. Payday loans are really meant to be paid back with their next paycheck.”
According to the Center for Responsible Lending, a national nonprofit research and policy organization, consumers are losing an estimated $3.4 billion to payday lending practices each year. The Consumer Federation of America, another research and consumer advocacy group, estimates that Americans spend $6 billion in payday loan fees each year and some $40 billion worth of loans are issued annually. The Center for Responsible Lending also claims structure of payday loans is not an effective way of providing one-time, emergency financial assistance, but rather equates to a debt trap for consumers, in part because 75 percent of payday loan borrowers fail to repay their loan within the two weeks typically mandated by such arrangements, thus incurring even steeper fees.
Davidson, however, said that when used responsibly, payday loans can benefit consumers as an emergency source of quick cash.
“They [payday lenders] are not trying to catch people into these huge debt traps,” said Davidson. “This is an issue that is very heated.”
Jean Ann Fox, director of the Consumer Federation of America, said Massachusetts banking regulators have worked diligently to protect consumers from payday lending. She said she has been impressed with their systematic approach and efforts to hold companies accountable.
“Massachusetts has done the most extreme work that I know of,” she said. “State regulators have been demonstrating that they do have jurisdiction.”
Last week, CFA launched a new Web site on payday lending to help inform the public and policymakers of statistics and dangers involved with those types of loans.
According to CFA, most consumers who use payday loans will do so more than once. Fox said it is normal to see a payday loan borrower take out eight loans in a year from a single company. The fee is typically between $15 and $30 per $100 borrowed for a two-week loan. The charges boil down to annual interest rates ranging from 390 percent to 780 percent.
The growing online component of payday lending also is cause for concern, said David E. Floreen, senior vice president of government affairs and trust services for the Massachusetts Bankers Association.
“Particularly with online [payday lenders], who knows who they are. Consumers have no way to verify,” he said.
“It’s extremely dangerous to send someone your Social Security number and your bank account information,” said Fox. “Some of those Web sites aren’t even secure. We think it’s identity theft waiting to happen. We urge people, just do not do this.”
As for the payday lenders currently advertising their services to Boston craigslist browsers, Cotney said regulators at the DOB are still researching the situation but plan to quickly notify the companies that such activity must stop.
