The banner ad atop the website features a wide-eyed baby cradled in an adult’s hands with the words, “Did that special vacation for two end up producing a third? Castle Payday has life’s unexpected expenses covered.”
On a growing number of sites such as this one, short-term loans are just a click away for Web-surfing borrowers, regardless of any history of bankruptcy, bounced checks or other credit problems.
Yet these “payday loans” often come with interest rates of 400 percent or more. The Castle Payday website advertises an effective 888 annual percentage rate, meaning a 14-day loan of $500 will end up costing the borrower $675.
Those who can’t scrape together the cash to pay off the loans along with their other bills may be tempted to take out another short-term loan to cover the first, potentially ensnaring them in a cycle of debt.
Consumer advocates say that companies such as Castle Payday are setting up shop on the Internet to avoid laws in some states that restrict or ban traditional storefront payday lending.
“More and more states are cracking down on payday lending, and it’s a lot easier to hide online than it is to hide in a storefront,” said Ed Mierzwinski, the consumer program director forU.S. PIRG
, a federation of state public interest research groups.
Industry groups contend that online payday loans provide a legal and vital service for millions of struggling Americans with few credit options.
“Most consumers don’t have the ability to get $500 or $600 in an emergency through their banks or credit unions,” said Peter Barden, a spokesman for theOnline Lenders Alliance
. “Credit-card limits have been reduced, equity loans have been reduced, so people are increasingly looking to alternative financial services companies for short-term credit. And like with any other industry right now, they’re looking online.”
Payday loans are illegal in 15 states. Nine others allow payday loans but enforce strict rules that limit fees, require longer repayment periods or restrict the number of loans per customer, according to astudy by the Pew Charitable Trust
Both Kansas and Missouri allow single-repayment loans with annual percentage rates of 391 percent or higher, according to the 2012 Pew study,which identified them as “permissive” states
in terms of payday lending.
In Kansas, the maximum cash advance permitted is $500 for a term of up to 30 days. Licensed or supervised lenders can’t charge more than 15 percent of the loan amount.
Missouri also allows loans of up to $500 for a term of 14 to 31 days. Borrowers are limited to six renewals, and interest and fees cannot exceed 75 percent of the loan amount.
Efforts failed last year to get an initiative on the Missouri ballot that would have capped the annual rate of payday loans at 36 percent.
In recent months, state and federal regulators have intensified pressure on banks to stop working with online lenders, but the industry is fighting back in court.
Thirty-one Republican members of Congress — including Kevin Yoder of Kansas and Ann Wagner and Blaine Luetkemeyer of Missouri — sent a letter last month to the Department of Justice and Federal Deposit Insurance Corp. In it, they accused the federal government of using audits and subpoenas to intimidate online lenders’ business partners.
“Your effort to stop banks from processing these lawful transactions would destroy many legitimate, legally compliant companies and small businesses, and adversely impact tens of millions of low-income American families who depend on short-term credit provided by online lenders because they do not qualify for traditional loans or credit cards,” the letter read.
The lawmakers called for a “more targeted approach.”
The legal situation is complicated by the fact that many lending websites are run by Native American tribes, which say their sovereign status means they aren’t subject to state laws. Castle Payday, for example, is operated by the Lac Vieux Desert Band of Lake Superior Chippewa Indians in Michigan.
The Lac Vieux joined with another tribe this month to seek an injunction against a New York regulator, arguing that states have no authority over them.
Unfortunately, non-Indian online lenders often claim tribal sovereignty in situations where their ties to tribes are loose at best, said Uriah King, the vice president of state policy for theCenter for Responsible Lending
, based in Durham, N.C.
“When we scratch the surface, they don’t look like tribal lenders,” King said. “They look like sham relationships that benefit the lenders, not the tribe.”
In one high-profile case, the payday lending operation AMG Services Inc. in Overland Park claimed to be owned by the Miami and Modoc tribes of Oklahoma and the Santee Sioux of Nebraska, yet the tribes reportedly received only 1 to 2 percent of the revenue from each loan.
The real benefactor allegedly was race car driver Scott Tucker, who used $40 million collected from borrowers to sponsor his racing team, according to a complaint filed last year by the Federal Trade Commission.
FTC officials accused Tucker, AMG Services and seven related companies — as well as three Internet-based lending companies and five other individuals — of violating federal law by charging inflated fees and threatening borrowers with arrest and lawsuits.
The FTC reached a partial settlement with Tucker and other principal defendants in the case in July.
Sovereign immunity for the tribes is a very serious issue, but it shouldn’t be used as a fig leaf for predatory lending, King said.
“At the end of the day, a payday loan is a junk product that gets people deeper into debt, and it doesn’t matter if it’s a bank or nonbank or a tribe,” he said. “The reality is that it’s just not a good product and it doesn’t matter who provides it.”
Consumers also should be wary of phony payday loan websites designed to steal their names, Social Security numbers and bank information, he said.
A federal judge in Illinois last week ordered one such operation in Tampa, Fla., to halt operations after an investigation by the Federal Trade Commission.
The FTC accused defendants Sean Mulrooney and Odafe Ogaga of using websites with names such as Vantage Funding, Ideal Advance and Your Loan Funding to debit consumers’ checking accounts without their permission. Tens of thousands of customers allegedly lost more than $5 million.
“You absolutely have no idea who you’re dealing with when you take out a loan online and you agree to let somebody put their hand in your bank account,” said Mierzwinski, the consumer advocate with U.S. PIRG. “Please step back and think, ‘Is there any other way I can get this money to meet my bills?’ Because once you go into high-cost payday lending, whether online or in person, it’s not something you do once. It’s usually something you do again and again and again.”