Law Enforcers Place Online Payday Lenders in Their Cross Hairs

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At least six federal agencies, including the U.S. Department of Justice (DOJ), the Consumer Protection Financial Bureau (CFPB), and the Federal Trade Commission (FTC), are currently coordinating a broad crackdown of the online payday lending industry. The agencies are trying to shut down companies that offer short-term loans online at very high interest rates.

The online payday lending industry is rapidly growing. Online payday lending volume rose by 10 percent to $18.6 billion in 2012. Online payday loans now account for nearly 40 percent of the payday lending industry.

The Department of Justice has issued civil subpoenas to more than 50 financial companies, including banks and payment processors, that connect borrowers with online lenders. Federal agencies are also pressuring banks to cut ties with online lenders to prevent the lenders from being able to access consumers’ bank accounts. The scope of the investigation shows that the crackdown is focused not just on the individual lenders, but also the infrastructure that supports the lenders.

Multiple state agencies are also involved in investigations of the online payday lending industry. State regulators have brought actions against online payday loan companies under various laws, such as usury laws that limit the amount of loans that can be provided to borrowers or cap the interest rates for the loans.

Earlier this month, New York State’s top financial regulator ordered 35 online payday lenders to stop offering loans that were in violation of the state’s usury laws and urged more than 100 banks to cut off access to the online payday lenders. At least nine states, including California, Colorado, Minnesota, Oregon and Virginia have also all taken action against individual online payday loan companies in the past year.

On August 12, 2013, the New York Attorney General’s Office sued Western Sky Financial, an online lender, and its affiliates alleging that they charged interest rates that were 10 times higher than rates allowed under the state usury law. Western Sky Financial operates on the land of the Cheyenne River Sioux Reservation in South Dakota and has already been the target of actions by regulators in Colorado, Oregon and Minnesota. Indian tribes are a major player in the online payday loan industry, with lenders forming partnerships and operating on tribal lands. Lenders have argued that they are part of a sovereign nation and not subject to federal or state laws.

Last year the FTC sued several companies for their payday loan practices, but some of the defendants sought to have their case dismissed, claiming that their affiliation with an American Indian tribe made them immune from those federal statutes. Last month a federal magistrate judge ruled that the FTC has authority over payday lending companies, regardless of their tribal affiliations, and that all companies are subject to regulation under the Federal Trade Commission Act, the Truth in Lending Act, and the Electronic Fund Transfer Act.

The online payday lending industry is attracting increasing scrutiny from both federal and state regulatory agencies, and more enforcement actions are very likely to come soon. Online payday lenders need to be sure that they are complying with all federal and state laws to avoid being in the government’s crosshairs.