Payday lenders have a lot in common with pawn shops, their close cousins: They depend on lending money to desperate people living close to the edge with nowhere else to turn. They first surfaced about 20 years ago in the South and Midwest, often as small mom-and-pop shops. Now the industry is dominated by large national chains, with some 20,000 storefronts nationwide. Coming out of the shadows of cyberspace, however, are Internet lenders, which are like storefront lenders on steroids.
The average payday loan is tiny, about $400, and in the benign view of the industry, it gives customers with trashed credit scores, who lack other credit options, emergency cash until their next paycheck arrives. But according to the Center for Responsible Lending, lenders charge a mind-boggling 391 to 521 percent interest for loans that have to be paid off in two weeks, often triggering a toxic cycle of debt, as borrowers take out fresh loans to cover the old ones. Internet loans are bigger, generally charge a higher annual percentage rate and, consequently, are more expensive than their storefront counterparts.
As non-banks, payday lenders have so far escaped federal regulation, leaving a hodgepodge of state laws as the only bulwark against these usurious loans. If the storefront lenders have been hard to regulate, Internet lenders have been even harder to find, as they make loans to lenders in states where they’re banned by setting up servers offshore or in states where they are legal. Industry experts put the number of online lenders in the hundreds, so far, but one website can reach many more people than a storefront. A January report from San Francisco-based JMP Securities estimated that market share for Internet lenders would hit 60 percent by 2016.
Some attorneys general in states with payday bans, like New York and West Virginia, have sued individual lenders for targeting residents in their states. A 2009 settlement by then-Attorney General Andrew Cuomo with two out-of-state Internet lenders was one of the few cases to force lenders to make restitution to scammed borrowers — 14,000 of them. But the lenders simply resurfaced in some other form.
Richard Cordray, chief of the new Consumer Financial Protection Bureau, has pledged to focus on the industry and held a public hearing on payday lending last January in Birmingham, Alabama. Yet he has been mum on new enforcement plans as the politically besieged bureau sets it sights on more mainstream products such as mortgages, credit cards and student loans.