A Record of Strife: Authorities Accuse Many Payday Lenders of Breaking the Law

Payday lending is proving to be as controversial as it is prolific. Government regulators and consumer advocates have taken action in many states both to curb payday lending and to target some of its worst practices:

Questionable Partnerships with Banks

The most aggressive crackdown so far has come from federal regulators, who say the entry of banks into payday lending is risky and worrisome. The Office of the Comptroller of the Currency, which regulates federal banks, has taken action four times since January 2002 to stop banks from partnering with payday lenders. That put an end to lucrative arrangements that existed among the banks and major payday lenders such as Advance America, Cash America, ACE Cash Express Inc., and Dollar Financial.

OCC chief John Hawke describes payday lenders who pair with banks as “third parties who want to evade state and local consumer protection laws.”

In one case, ACE and its partner, Goleta National Bank of Goleta, Calif., were ordered to pay a total of $325,000 in fines. Regulators not only stopped their payday loan business, but they also accused the two of violating federal rules protecting customers’ privacy after finding 641 ACE loan files in a dumpster in Portsmouth, Va.

Things are different at the state level. In March the Federal Deposit Insurance Corporation issued draft guidelines that would allow for state-chartered banks to participate in payday lending, a move that angered consumer activists. Those guidelines permit payday lenders in states with restrictive usury laws to charge more, because their bank partner is governed by the laws of its home state, which are usually more lenient or non-existent.

Illegal Debt Collection

Payday lenders accept personal checks knowing the customer probably doesn’t have enough on deposit to cover the check. But many payday lenders cry fraud—and threaten to use the power of the criminal justice system—when customers can’t manage to deposit enough money in their bank accounts to cover the debt when the post-dated check is finally cashed. In Texas, payday lenders flooded the court system with 13,000 criminal complaints in a single year in a single Dallas County precinct.

In Illinois, state authorities alleged that payday lender Nationwide Budget Finance, Inc., mailed fake warning letters to delinquent customers. Nationwide’s employee manual also instructed workers to call a borrower’s personal references and falsely tell them Nationwide was issuing a warrant for the borrower’s arrest.

In West Virginia, 81 consumers won cash refunds and debt cancellations in a state settlement that came after a customer complained that Ohio Valley Check Cashing and Loan sent him threatening letters and warned of criminal prosecution if he didn’t pay his loan in full. In Georgia, two payday lenders were convicted of using threats of violence and arson to collect debts.

High Fees

In an Arkansas case, authorities found Advance America was charging interest rates of between 336 and 720 percent, far in excess of the state’s 17 percent limit.

In Texas, a study by the Consumer Federation of America found that only 40 payday loan outlets complied with state limits, while 895 partnered with state banks to charge higher rates.

In Colorado, ACE Cash Express paid $1.3 million in restitution and agreed to abide by payday laws after state authorities found the firm charging illegal fees for loan rollovers. It marked the largest fine ever paid in a consumer case brought by the state.

Paul Hauser, a check cashing store owner and president of the industry’s Florida trade group, says payday lenders have been the victim of overzealous regulation by the OCC’s Hawke. He says the lenders don’t oppose reasonable limits set by states, but that they still must to be able to charge enough to cover their costs.

As for excesses in fees, Hauser says the market will take care of itself. “There’s enough competition that the higher-priced outlets will go out of business.”