Lawsuit rattles the cages of online payday lenders

12/17/2013 2:38 PM

12/17/2013 5:57 PM

A consumer watchdog lawsuit filed this week against a California-based online loan collector should be causing some consternation in the Kansas City area, which has rapidly become a cradle for noxious businesses that make quick money by lending money over the Internet at exorbitant rates.

The Consumer Finance Protection Bureau sued CashCall Inc. of Anaheim, alleging that, among other things, the company had debited people’s checking accounts for loans that had been made illegally and therefore were void.

The federal agency is working with at least eight states that, unlike Missouri and, to a lesser extent, Kansas, protect consumers with tough usury laws. The interest rates on the online loans that CashCall was involved with exceed the permitted limits in the states, which is why the CFPB says they are illegal and nonbinding.

The loans were made by Western Sky Financial, an Internet lender based in South Dakota. Like a number of online lenders, including some in the Kansas City area, Western Sky purports to be owned by an Indian tribe, and therefore exempt from state laws.

The Consumer Finance Protection Bureau isn’t buying that, and neither are the attorneys general of states like Arkansas, Arizona, Colorado and North Carolina. They’ve been eyeing Western Sky for a couple of years, and the company stopped making loans earlier this year. CashCall and two of its subsidiaries have continued to make attempts to collect from borrowers, so now they are lawsuit targets.

CashCall is denying it has done anything wrong and vowing to fight in court. Regardless of the outcome, the legal action taken this week is hardly the crushing blow for online lenders, which have shown endless creativity in finding loopholes and detours around the law. It will take eternal vigilance against unscrupulous lenders and their backup partners to hold the line on unscrupulous short-term loan practices.

But the lawsuit against CashCall is an effective shot across the bow. It would be great if the companies are ordered to refund customers if the loans are deemed to have been made illegally.

It would also be great if other states — are you listening, Missouri? — would tighten up their laws regarding short-term lending and give their attorneys general some tools to go after businesses that prey on low-income consumers. But the payday loan industry is fighting tougher regulations tooth and nail, and so far Missouri lawmakers have been a receptive audience.

More about the Kansas City area’s outsized role in online payday lending can be found in

this Kansas City Star editorial, and in a more exhaustive series by The Pitch.

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