Online Loan Sharks Trap People Into Debt -- Then Disappear

On Thursday the online payday lending industry wrapped up a three day-conference at a hotel near the White House, during which it courted senators and congressmen from both parties. When the Online Lenders Alliance formed in 2005, the "first step was to eliminate the 'bad apples' and standardize the principles by which loans should be made."

"When customers see that you belong to OLA, they know they will not only get financial relief," says the OLA's website, "but that they are doing business with a reputable company that adheres to good business practices and principles."

But who are the good apples who belong to the OLA? The OLA's site provides no details on membership, and one is hard-pressed to find many online payday lenders that mention the Alliance. (Though some do, like Loan Point USA and PaydaySpot.com. An OLA spokeswoman did not respond to a request for more info.) The OLA's conference agenda (PDF), obtained by the Huffington Post, lists several sponsors and exhibitors -- but almost all of them are either marketing or consulting firms.

Nevertheless, it's not hard to find an online payday loan. Online lending is a growing part of the payday lending industry, with $7.1 billion in estimated loan volume for 2008, compared with $35 billion for storefronts, according to one estimate.

Steven Schlein, a spokesman for the Consumer Financial Services Association -- the storefront payday lending lobby -- told the Huffington Post that online lending is "the Wild West."

Consumer advocates sent a letter to members of Congress on Wednesday urging them to ignore the conference and implement a cap on interest rates. "Online payday lending began in large part as a way to avoid state regulations of payday lending," the letter said.

"It's just one of those things with the internet. You're layering a whole other set of risks on top of a product that is set to fail by its basic structure," said Leslie Parrish, a senior researcher with the Center for Responsible Lending. Parrish's group, which signed the letter to Congress, considers online loans essentially the same as their storefront counterparts. But the lenders are harder to track.

Dale Pittman, a consumer protection lawyer who represents victims of debt collection harassment and abuse in Petersburg, Va., has some experience tracking online lenders.

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"It's hard as hell to find these people," he told the Huffington Post. "You can't communicate with them and tell them what they're doing is illegal." Thirty-five states have enacted interest caps that effectively ban payday lending, but Virginia isn't one of them. Still, a lender needs a license from the state government.

Pittman tried to track down several online lenders on behalf of a client who was drowning in debt after taking out multiple payday loans over the course of a year. None of the lenders had a license, as far as Pittman could tell, so all the loans were illegal. (If the lenders are OLA members, they're disobeying "best practices" if they fail to remain "in compliance with all applicable laws and regulations.")

Pittman's client, David Redford, told the Huffington Post he took out a $500 online payday loan in late 2007. He said he still didn't have enough to keep ahead of the $950 monthly rent on his family's home in Virginia and the utility bills, car payments, and other expenses. It wasn't long before he went online to take out another loan, and another, and another.

"Every couple weeks we were taking out a new loan to pay off the old one," said Redford's wife, Tawnya.

The Redfords said they made minimum payments every other week -- which started at $75 and eventually reached $250 -- and never dented the principal they owed. A year after taking out his first loan, Redford owed hundreds of dollars to each of at least six lenders, including capitalfunding.com, paydayloanyes.com, papercheckpayday.com, cashtransfercenters.com, and upfrontmoney.com. Bank fees piled up as the lenders siphoned money from his account.

"I was drowning in overdrafts," he said. "I didn't know if it was OK or if it was illegal."

It wasn't, according to his lawyer. But Pittman was only able to locate a human being from one of the websites: upfrontmoney.com, headed by one Warren Williams of North Carolina. (Williams did not respond to inquiries from the Huffington Post.)

"We located him and had several discussions with him," Pittman said. Redford's contract with upfrontmoney.com states that the company "is not in the business of making any type of loan" -- instead, it provides a big cash rebate after the customer purchases a prepaid phone card.

Pittman said Warren didn't put too much effort into the it's-a-rebate-not-a-loan argument -- a typical sham, according Consumer Federation of America -- before forking over $6,000 in a January settlement. Pittman wasn't surprised: "It's just all complete nonsense. It's fairy tale stuff. It's bullshit."

HuffPost readers: Have you had a bad experience (or a positive one!) with an online payday lender? Got a tip on the industry? Email us at [e-mail].

UPDATE: CFSA's Steven Schlein wrote the Huffington Post to say that his "Wild West" characterization was directed at "rogue offshore lenders," not the entire online lending industry. Schlein wrote that the OLA "has been a constructive force in its efforts to bring industry best practices and standards of conduct to the internet cash advance sector."

Comments

[lendmeyourvag]

What else did people expect to happen once all the brick-and-mortar lenders were banned out of existence?! At least those businesses were accountable to the states they operated in. The opposition did nothing to address the demand that REMAINED, and so borrowers in need turned to whomever they could, and those people were much more difficult to track and address.

[PaydayLendingRep]

Appropriate state regulations provide strong protections for consumers, while ensuring continued access to choices for short-term credit needs. That same principle should apply in cyberspace. Customers who choose to get a payday advance online should not forfeit any of the protections they would have at a store-front lender.

CFSA members are required to provide Internet loans in accordance with the laws of the state in which the customer resides, we are taking an important step toward ensuring that this service is both convenient and safe for consumers.


We support educating and providing solutions for customers who may have become over-reliant on the service.

State regulator reports show that more than 90 percent of payday advances are repaid when due.

These are business, not charities. It would not make good business sense to loan money to people who can't pay you back.

[truthinlending]

"UPDATE: CFSA's Steven Schlein wrote the Huffington Post to say that his "Wild West" characterization was directed at "rogue offshore lenders," not the entire online lending industry.

Whoops-I guess someone clued him in that his members are also online payday lenders.

"Schlein wrote that the OLA "has been a constructive force in its efforts to bring industry best practices and standards of conduct to the internet cash advance sector."

If by Industry best practices and standards of conduct he means:
1. Selling a product that looks like a short-term loan but is designed to trap the borrower into repeated loans.
2. Deceiving the borrower and the public about the real cost of these loans
3. Hiring bloggers pretending to be members of the public to talk about how "helpful" it is to pay 400% interest for a loan.
4. Constantly creating new products and re-inventing their product to avoid state and federal laws.
Then I agree!

[truthinlending]

"Steven Schlein, a spokesman for the Consumer Financial Services Association -- the storefront payday lending lobby -- told the Huffington Post that online lending is "the Wild West."

I am assuming by this comment that members of the CFSA are somehow better in how they gouge their borrowers? Perhaps they are more ethical and willingly comply with state laws? Guess what? Several members of the CFSA are also online lenders. For example, the two biggest storefront payday lenders in the country: Advance America and Check N Go.

In Virginia, Advance America and others systematically shifted many of their customers last December from payday loans to "lines of credit" in order to avoid changes to Virginia's payday loan law that went into effect January 1st. They testified in our state legislature that they weren't trying to get around Virginia's laws, just offering a new product. That testimony, just like everything else the payday lenders have to say, is ____ (see Dale Pittman's last comment in the story).

[sparagi]

Online payday lending is a completely different ball game. Most of the websites are lead generation companies. OLA has to become more transparent, if they want to be effective. I'm sure lenders do not want to advertise this way b/c it puts a big bull's eye on their foreheads and makes them open to class action lawsuits.

See this post about an Internet lender that settled a law suit in Wisconsin and what Nevada is doing about it here: http://pdlindustry.blogspot.com/2009/02/internet-lender-hit-with-60k-class.html and http://pdlindustry.blogspot.com/2009/02/nevada-intenet-lenders-under-fire.html.

The reality is that there are a lot of off-shore internet lenders making a lot of money. They're never going to stop, so you might as well allow payday loans here where we can regulate them. This issue is a lot like the offshore gambling.

The reality is that the product has a huge demand. The numbers do not lie. Regulate it but don't put lenders out of business b/c people will just go to offshore companies for a loan. Why not encourage store fronts. These lenders are more accountable.

If anyone has an idea to identify lenders that are licensed and regulated online, I'll do it. I'll even put them on my website.

[Mycorrhizae]

I have an idea-- SPAM elsewhere.

[Tom95134]

What's the difference between the On0line Loan Sharks and Mafia Loan Sharks? The mafia breaks your legs (but could be prosecuted), the on-line loans sharks bleed you to death and have the judicial system to protect them.

[AndyBitMeAgain]

The Mafia was remiss in its campaign contributions, silly.

BTW, I just doubled your Visa interest rate. You were late with your comment. Oopsies.