Online Predatory Loans Breaking State Usury Laws
Online Predatory Loans
Online predatory loans are legally distinguishable from “Payday Loans.” Payday loans are high interest very short term loans designed to fill an immediate need. They are the subject of continuing ongoing debate between those who would outlaw them completely and those who see them as a legal means for coping with dire short term financial emergencies. Many states have separate laws exempting payday loans from the usury rate that applies to ordinary loans. Legislators have succumbed to the sweet talking lobbyists that payday loan companies pay very generously. After all a payday loan may be a better option than getting a car repossessed or having the electricity shut off. A bank will charge you $35.00 if you bounce a check because you were short $1.00 won’t they? State usury laws are also being circumvented via online predatory loans. New York and other states are cracking down.
Do Usury laws Apply to Online Predatory Loans?
Most states have usury laws defining the top interest rate allowed by law. In New York it is 25 percent. In Arkansas it is 17 percent. In Rhode Island it is 21 percent. Exceptions to this include credit cards which are allowed to charge up to 36 percent. So how is it that online lenders can market installment loans that have absurdly high APRs of 342 percent? In some cases up to 1,095 percent? Why are banks facilitating this practice by making the Automated Clearing House (ACH) feature available for automatic withdrawals of monthly payments?
Are Native American Tribes a “Sovereign Nation” Exempt from Online Predatory Loan Laws?
Western Sky Financial, a South Dakota based online financial lender has been sent a “cease and desist” order along with 35 other companies offering illegal high interest loans to consumers. New York State Attorney General Eric T. Schneiderman has filed a lawsuit that will have far reaching consequences in defining the future of these loans. Other states are watching closely.
Western Sky Financial claims that it’s usurious predatory loans are made within its rights as a sovereign Indian nation operating within the borders of the Cheyenne River Sioux Reservation. Western Sky claims to be the largest private employer on the impoverished Cheyenne River Indian Reservation. What they don’t say is that as soon as the loan is signed it is sold to Cashcall, a California on line lender with no claim of special ties to Native American needs. The Cashcall loan I’ve been following was then sold to “Delbert Services Corporation” out of Anaheim 3 months later. Delbert failed to respond to a complaint to the CFPB resulting in the deletion of the default from Experian’s credit report. Western Sky recently finally surrendered to the growing pressure and agreed to stop funding loans.
The Native American connection is the thinnest of shells for the real players to hide behind. The borrower refused to sign a new authorization for Delbert to withdraw payments from his checking account. When he missed his scheduled payments Delbert reported him to Experian. His credit score was devastated. A complaint to Experian was dismissed. A request for re-investigation was dismissed. A carefully documented appeal to the CFPB claiming usury and no agreement with Delbert was not answered by Delbert. Experian deleted all reference to the matter. This predatory loan did not have a legal leg to stand on. How many consumers just meekly pay or give up when the credit reporting agency does not do its job?
Texas-originated loans facilitated by Credit Service Organizations/Credit Access Businesses are the worst offenders.
GreatPlainsLending.com claims to be “a tribal lending entity wholly owned by the Otoe-Missouria Tribe of Indians, a sovereign nation located within the United State of America, and is operating within the boundaries of the Otoe-Missouria Reservation.” Its literature proudly proclaims: “First time Great Plains Lending customers typically qualify for an installment loan of $100 to $1000 with an APR of 349.05% to 448.76% which is less than the average 706.03% APR for a typical payday loan.”
Online Predatory Loans Have an Interesting Legal Status
Setting aside the question of sovereign Native American status law for a moment, the first question a Freshman Law student would ask is: Does the law of the state of the lender or the state of the borrower apply? Marquette National Bank v First of Omaha Corp., 439 US 299 (1978) addressed this question head on. Its conclusion was that the law of the state of origination governs the transaction at least for credit card interest rates. You can be sure Attorney General Schneiderman and his staff have studied this 35 year old decision in minute detail. Perhaps the bank’s participation is the weak link they are looking at. Patriot Act regulations that apply to foreign banks could be applied to those providers of online predatory loans who claim separate “sovereign status.”
UPDATE: The Nevada Federal District Court ruled in March of 2014 that the FTC has broad legal authority to regulate lending transactions trying to hide behind Native American Indian Tribal Immunity. The ruling against AMG Services Inc. criticizes the payday loan company for deceptive and illegal practices cloaked in claims of immunity based on tenuous connections with Indian tribes. This case has wide reaching implications for the future. Among the other violations were violations of the Electronic Funds Transfer Act by the use of pre-authorized fund transfer from checking accounts. The FTC’s Credit Practices Rule prohibits payday lenders from requiring borrowers to consent to have wages taken directly out of their paychecks in the event of a default. Regardless of tribal affiliation debt collectors must comply with Federal law. Consumers cannot be sued in tribal courts without jurisdiction.
Challenging the legality of the credit reporting negative entry has not failed up to this point. In my opinion these jackals are making too much money to risk test cases for relatively small amounts of money.
Online Predatory Loans and the Credit Reporting Agencies
What happens when borrowers default on their online predatory loans as far as the credit reporting agencies are concerned? Do the lenders report late payments? On time payments? Defaults? The providers of online predatory loans certainly use the credit reporting agencies to make inquiries of applicants before approving loans. I know that Cashcall reports its installment loan payments to Experian and but not to TransUnion or Equifax. These payments on their online predatory loans are treated just like any other installment loan payments for credit scoring purposes. Since the credit reporting agencies accept membership fees from providers of online predatory loans it’s a safe bet that they take the lenders at their word as far as alleged late payments and defaults are concerned. I don’t yet know if this practice is consistent with all online predatory loans from various sources. I do know that the real clients of the credit reporting agencies are the lenders who pay fees for access. “legal and legitimate until proven otherwise” has always been their policy. I will update when I find out more.
UPDATE: “Operation Choke Point” Pressures Financial Institutions
An aggressive program the federal government has name “Operation Choke Point” is pressuring banks and other financial institutions to stop being partners in online predatory lending.The Justice Department has emphasized that its investigations target only unlawful conduct but banks are making it clear to online lenders that they will be more selective in the future. A federal judge in New York state recently characterized the tribe’s sovereignty arguments to run around state usury laws as “wobbly.”
UPDATE: The CFPB has passed new rules limiting predatory loans. The consumers income and ability to repay must be taken into account. The CFPB is squeezing these loans out of existence with its ongoing tightening of the rules.