Individual states have different regulations responsible for online and payday lending. Some require lenders to have a license if they charge above a certain interest rate. Others make predatory lending illegal. Because many payday loan companies operate online, rather than in a brick-and-mortar storefront, consumers may still be able to access these loans, even if it is illegal for the lender to operate in the consumer’s state.
According to a white paper by the Consumer Financial Protection Bureau (4/24/13), titled “Payday Loans and Deposit Advance Products,” although the use of online payday loans is small compared to those from a storefront loan, online loan use is growing and could one day become more popular than loans offered from a storefront.
The report notes that online loans tend to come with fees equal to or higher than storefront loans, possibly because of the cost of customer acquisition and the higher loss rate. Some online loans come with an automatic rollover, in which the lender only debits the consumer’s account for the fee and the loan is automatically rolled over. It is then up to the borrower to notify the lender if he or she wishes to pay the loan in full.
Although the report focuses on storefront payday loans (the bureau noted it would be conducting an analysis of the online loan market in the future), because the fees are similar, some of the findings can be extended to online payday lenders. The Consumer Financial Protection Bureau notes that with storefront loans, fees are typically expressed as a dollar amount per $100 borrowed. Most fees run from $10 to $20 per $100 borrowed; a fee of $15 per $100 borrowed equals an APR of 391 percent on a 14-day loan.
A concern for critics is that the people using these loans are often struggling to pay their basic expenses, and predatory loans with high fees are likely to push them further into financial difficulty.
Some states are now investigating online payday lenders, with New York filing a lawsuit against three lenders, alleging the lenders charged interest rates that were higher than the state allowed. On August 12, 2013, New York Attorney General Eric T. Schneiderman announced lawsuits were filed against Western Sky Financial, LLC; CashCall, Inc; WS Funding, LLC; and their owners for violating lending laws.
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“The companies took advantage of these consumers by charging extremely high rates of interest that were above New York State’s usury caps,” according to the news release. “For example, consumers that received loans of $1,000 were charged an interest rate of more than 234%, and had to repay as much as $4,942 in interest and principal over just two years."
In response to the lawsuit, Western Sky Financial reportedly announced it would stop funding loans on September 3, 2013. On its website, the company blamed “unwarranted regulator oversight” for the decision to lay off approximately 100 employees.