Every industry has its faults, but there are only a few for which it can be said that society would be better off if they did not exist at all. One member of that special group is payday lending, the business of providing short-term cash advances to desperate people at unconscionably high interest rates with the expectation that they will not be able to repay the money and thereby get caught in an ever-worsening debt trap.
National People’s Action and other groups fighting predatory lending are highlighting this problem with their Shark Week Campaign. An NPA fact sheet does a good job of summarizing what’s wrong with payday lending and links to some of the best research on the subject, including a 2013 report by the Center for Responsible Lending that makes the case for stronger federal regulation. The issue was also the focus of a brilliant segment on John Oliver’s HBO show that included a mock public service ad narrated by Sarah Silverman arguing that the best alternative to payday loans is “anything else.”
While stricter rules are clearly needed, the good news is that the sharks are no longer operating with total impunity. The Dodd-Frank Act opened the door to federal action on payday lending, and the Consumer Financial Protection Bureau is starting to act on that authority. Last November, the agency ordered Cash America International, one of the largest predators, to pay $19 million ($5 million in fines and $14 million in refunds to customers) for using illegal robo-signing in preparing court documents in debt collection lawsuits. The company was also charged with violating special rules involving lending to military families. In addition, Cash America was accused of destroying documents relevant to the agency’s investigation of its practices.
In the wake of that case, the CFPB took its first action against an online payday lender, suing CashCall Inc. for engaging in “unfair, deceptive, and abusive practices, including debiting consumer checking accounts for loans that were void.” In July, the bureau announced that Ace Cash Express would pay $10 million to settle charges that it engaged in “illegal debt collections tactics — including harassment and false threats of lawsuits or criminal prosecution — to pressure overdue borrowers into taking out additional loans they could not afford.”
Last March, the bureau held a field hearing on payday lending and issued a report finding that more than 80 percent of loans by the industry are rolled over or followed by another loan. The Justice Department is reported to be carrying out an investigation of the role of banks in financing payday lenders.
The sharks are also under attack at the state and local level. Manhattan District Attorney Cyrus Vance Jr. just announced the criminal indictment of a group of online payday lenders and the individuals who control them. The case is an effort to get at companies that use complicated corporate structures and offshore registration to get around the interest rate caps that states such as New York have adopted.
In June, officials in Maryland announced that South Dakota-based Western Sky Financial and CashCall would pay about $2 million to settle charges that they engaged in “abusive payday lending and collections activities” that included loans with annual interest rates of more than 1,800 percent. The settlement also permanently barred the companies from doing any business in the state that required licensing.
Last October, five payday lending companies had to pay $300,000 to settle charges brought by the New York State attorney general, and the year before Sure Advance had to hand over $760,000 to settle allegations that it charged illegal rates as high as 1,564 percent.
Payday lenders have also been targeted in class action lawsuits. Cash America agreed to pay up to $36 million to settle one such case that had been brought under Georgia’s usury and racketeering laws.
Faced with a dwindling number of states in which they can operate as they please, along with tighter federal rules, some of the payday companies are giving up. For example, giant Cash America is reportedly planning to spin off its payday lending operations and focus instead on the supposedly more reputable business of pawn shops.
Most stories about attempts to control abusive commercial practices end up with corporations finding a way to prevail. Payday lending may turn out to be that rare case in which the predators lose.