Payday Advance State Legislation

A Regulated Alternative to Unregulated Internet Lenders

While there is nothing inherently illegal or unethical about Internet payday lending, without a doubt, there is tremendous room for consumer abuse. Following applicable law, Internet lenders can deliver convenient and responsible payday loans. But all too often, unscrupulous lenders hide behind sophisticated Web sites, delivering nothing but trouble to unsuspecting consumers.

More and more consumers are getting payday loans over the Internet.

Consumer demand for small denomination, short-term credit is growing.

• Industry analysts estimate $40 billion in payday loan volume nationally, from traditional storefront locations.
• Internet search engines identify about 3,000 web sites delivering payday loans online, either directly to the consumer or by generating leads for Internet lenders.

Responsible and balanced state payday loan laws is the strongest deterrent against unregulated Internet lending.

One national Internet lender has revealed that the company receives five to ten times as many payday loan applications from unregulated states versus those with state regulation.

• With access to a local payday lender, consumers appear to be less likely to take risks with faceless strangers for their short-term financial needs.

State regulation that strikes a balance between providing strong protections for consumers and enabling reputable lenders to profitably set up local storefronts may reduce consumer dependence on unregulated cyberspace lenders.

1. A majority of the 37 states that regulate payday lending cap the service fee below that of the typical Internet payday loan.
2. Regulated payday lenders must comply with the Truth in Lending law and provide full and clear disclosure of loan terms and cost.
3. Most state laws prohibit rollovers and none make the renewals automatic, as many online lenders do.
4. Traditional storefront payday lenders are established businesses with personal contact between them and their customers, while Internet lenders are more often unknown entities, with the only contact being direct access to customers’ bank accounts.
5. Regulated payday lenders have privacy policies, which are disclosed to consumers.
6. State-regulated payday lenders are licensed by the state and easily accessible to customers for personal service, as well as for dispute resolution.

Evidence mounts that consumers are susceptible to unscrupulous and illegal practices of many Internet lenders who do not comply with applicable laws.

A consumer advocate survey of online payday lenders, media reports and information from some state regulators reveal substantial problems with Internet payday lending.

Fees are high and disclosures inadequate.

• The most frequently posted finance charge of surveyed lenders was $25 per $100 borrowed, the next most frequent was $30 per hundred.
• Only 57% posted the finance charge and almost never in a conspicuous place.
• Just over a third (38%) disclosed annual percentage rates (APR) before customers had to complete the application process.
• Many lenders automatically renew the payday loans, a practice typically hidden in the small print.

Consumers are exposed to privacy and security risks.

• Internet payday lenders require a tremendous amount of personal information, including bank account numbers, Social Security number, driver’s license number, and even mother’s maiden name, along with customer’s name, address and employment information.
• Personal data is transmitted to lenders over web links, many of which may be unsecure.
• Lenders have access to consumers’ bank accounts, so they can electronically deposit loan proceeds and withdraw loan payments, with no personal contact between the two parties.
• Some regulators say consumers can have a difficult time stopping lenders from taking money out of their bank accounts.

Online lenders are unknown, faceless entities, often leaving consumers with no recourse.

• Difficulties in identifying, locating or communicating with lenders make it difficult to resolve disputes.
• Some lenders are licensed in their home states, others hide behind anonymous domain registrations or are located outside of the U. S.
• There is no national association representing online payday lenders.

There are questions concerning applicable law and regulatory jurisdiction for online payday lenders.

• Many state officials are trying to take action, but are having problems locating lenders.
• A large number of lenders are located offshore and out of reach of American laws.