Payday Loans Online Increase Consumer Choice, Despite Critics

Lenders who offer bad credit loans, including payday loans online, personal installment loans and auto title loans, have come under increasing attack in recent years. The Consumer Financial Protection Bureau, or CFPB, has been the most vocal critic of these bad credit lenders. The CFPB published its proposed regulations for short-term, small-dollar loans in June 2016. Included in the 1,341 pages of new rules and explanations is a section that deals specifically with lenders who offer payday loans online. Despite the pending proposed regulations and the criticism leveled at the lenders, however, the number of borrowers seeking payday loans online continues to increase.

Why Payday Loans Online Continue to Increase Despite Criticism of the Industry

In recent years, many states and municipalities have passed laws that have made it difficult or impossible for payday lenders or others who offer bad credit loans to operate a traditional storefront. However, as multiple witnesses pointed out during testimony before the U.S. House of Representatives Committee on Financial Services, outlawing a product is not the same as eliminating the demand for the product. In simple terms, people want the ability to borrow small amounts of money when they need to handle a financial emergency, and if they cannot deal with a payday lender who has a store, they will turn to a lender who offers the loans online.

However, there are other reasons for the increasing number of people looking online for a payday loan. Unlike stores, websites are open 24/7, which means that borrowers can submit their applications when it is convenient for them to do so instead of trying to arrange their schedules around a store’s hours. Some online borrowers do not have transportation to a storefront, especially if they live in a rural area. Other borrowers prefer the privacy that obtaining a payday loan online offers; they need not worry that people from their church, work or neighborhood will see them entering a payday loan store and make incorrect assumptions about the borrower’s financial condition.

How Much Have Online Loans Increased?

Precise numbers are difficult to obtain. Many lenders offer payday loans online as well as through their storefronts, and they do not always separate their information by category. Furthermore, many researchers have combined all of the different loan products, such as auto title loans and payday loans, when issuing their reports. The Pew Charitable Trusts reports that online payday loans in 2013 were almost triple what they were in 2006; in 2013, approximately 33 percent of all payday loans originated online.

However, the numbers vary widely by location. According to the State of California Department of Business Oversight, online payday loans represented 8 percent of the total in 2013 and 7 percent of the total in 2014. Interestingly, the average dollar amount for an online loan, the number of people seeking these loans and the number of transactions all increased.

The effects of state and municipal laws can also impact the number of people who choose to seek a payday loan online. A report published on Nonprime101.com highlighted this trend. After Austin, Texas, passed a city ordinance that limited payday loans to a maximum of 20 percent of the borrower’s gross monthly income and limited loans to three renewals, storefront payday loans declined by 25 percent in Austin. However, the number of people applying for a payday loan online increased by 85 percent. For comparison, storefront payday loans throughout the entire state decreased 17 percent and the number of people submitting applications for an online payday loan increased 68 percent statewide. The results were similar when Dallas, Texas, passed its ordinance restricting payday lenders.

CFPB Not Alone in Attacks on Online Payday Loans

The CFPB is not the only agency that has targeted lenders offering payday loans or other credit products to borrowers with bad credit. According to Breitbart.com, the Federal Deposit Insurance Corporation, the CFPB and the Department of Justice launched a secretive initiative in 2013 that targeted both online and traditional payday lenders as well as the banks and third-party payment processors doing business with them. The initiative, known as Operation Choke Point, grew out of a task force established by one of President Obama’s task forces. Congress was kept out of the loop to such an extent that when 31 members sent a letter to the chairman of the FDIC and the U.S. Attorney General, they did not know the name of the operation or that it had become a federal initiative. In their letter, the members of Congress stated that actions to change the “structure of the financial system” was beyond the agencies’ congressional mandates, that Congress had recognized the need for small-dollar, short-term credit products and that Congress had not tried to prohibit online or storefront lenders from offering such products.

The members of the task force began by targeting banks that did business with online lenders. By September 2013, over 50 subpoenas had been issued to third-party payment processors and banks. While the DOJ had refused to provide details of the task force’s activities to Congress, it willingly shared information at a meeting of bank examiners — who coincidentally play a huge role in influencing the conduct of banks by exerting pressure and threats. It was at this meeting that the DOJ confirmed that the Federal Trade Commission, the Federal Bureau of Investigation and the U.S. Postal Inspection Service were also involved in Operation Choke Point.

Less than five months after the task force spoke at the bank examiners’ meeting, the DOJ announced that a North Carolina bank charged with turning a “blind eye” to online payday lenders had agreed to a settlement of $1.2 million. The bank was charged with “facilitating fraudulent transactions.” In its complaint, the DOJ stated that banks are required to obtain information regarding the business activities of their customers as well as the true identities of their business entities. As part of the settlement, the bank agreed that if customers offered online payday loans, the bank would conduct “due diligence” to ensure that the lender did not engage in deceptive or false business practices or violate any state laws, including usury laws, or any federal laws.

In an article appearing on Lexology.com, one law firm expressed concern over Operation Choke Point, echoing the opinions expressed by many that the federal government is less interested in regulating payday lenders than it is in putting them out of business. The attorneys questioned the effects of warnings issued by the Office of the Comptroller of the Currency and the FDIC about the risks that banks faced if they process online payday loans, combined with the DOJ’s aggressive actions, might have on the online payday loan industry. They felt that Operation Choke Point could drive some lenders out of business — even if they were in full compliance with all applicable laws.

Should You Apply for a Payday Loan Online?

An online payday loan can be a convenient way to solve your short-term financial challenges. However, before deciding, you might want to learn more about them as well as other financial products that are available even if you have bad credit. You will find many helpful articles on payday loans and installment loans at the Personal Money Store.

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