Online Payday Loans Run Afoul of State Regulators

Online payday loans have been subjected to a great deal of scrutiny in the last 10 years as well as scathing criticism. Because the federal government left the regulation of payday loans to each individual state, the applicable laws were based on the physical location where the lender made the loans. As certain states moved to cap interest rates, ban payday loans or otherwise regulate the industry, many lenders turned to online payday loans to reach borrowers in states where paycheck loans were banned or highly regulated. However, payday lenders are increasingly running afoul of new regulations enacted at the state level to control them.

How State Regulators Are Using Their Powers to Control Online Payday Loans

When payday lenders began moving online, most of them operated under the assumption that the laws they needed to follow were the prevailing statutes in the state in which the lender was based. Naturally, most lenders chose to set up operations in states with lenient laws on payday loans. From their base, lenders could then make online payday loans to borrowers in the same state as well as in other states with more restrictive laws. Some lenders moved offshore or entered into agreements with Native American tribes to base their operations on tribal lands.

The Pew Charitable Trusts has reported that many of the lenders claimed that they were exempt from state laws. Lenders with tribal affiliations invoked the principle of Native American sovereignty, while offshore lenders claimed that they were exempt from state laws because they were a foreign company with no physical presence in the state. Other lenders simply stood firm on their assertions that the states could not regulate interstate commerce or prevent out-of-state lenders from making loans to residents.

However, state lawmakers began to view such assertions as thinly veiled attempts to circumvent the law. Many states with laws regulating storefront payday loans began to get started the same rules to online lenders. Needless to say, the issue has spawned a rash of lawsuits initiated by both state governments and payday lenders.

The Murky Waters of Online Payday Loans and State Regulations

Regardless of the party bringing suit, it is up to the court having jurisdiction over the matter to render a verdict. In many suits, the court has sided with the state, but there have also been cases that were decided in favor of the lender.

• The Minnesota Supreme Court ruled that online lenders based in another state must comply with Minnesota’s restrictive laws for online loans issued to residents of Minnesota, according to an article appearing in the Star Tribune.
• In an opposite opinion, a court in California ruled that state regulators did not have jurisdiction over lenders who were legitimately operating as a branch of a Native American tribe.
• A federal court ruled that a lender with tribal affiliations could not claim sovereign immunity to issue online loans that were not in compliance with state laws to residents of New York.
• In Arkansas, the attorney general’s office has filed numerous suits against online payday lenders to prevent lenders from collecting payments from or offering loans to residents of Arkansas if the loans violated the state’s usury cap.
• One of the most active state litigators has been Lisa Madigan, the attorney general of Illinois. Madigan has campaigned against payday lenders for several years and has been largely responsible for the tightening of state regulations. In October 2016, a press release issued by the office of the Illinois Attorney General announced Madigan had reached a settlement with a Delaware-based online lender that had made loans to residents of Illinois. The settlement was reportedly $3.5 million, ending a suit that had begun in 2014.

What the Future Holds for Online Payday Lenders

At the moment, the future looks anything but bright for online payday loans. Almost every state has enacted or is considering legislation to regulate payday loans, and most are extending coverage to online loans. Furthermore, the federal government has become very active in recent years over the issue of payday loans. The pending regulations proposed by the Consumer Financial Protection Bureau specifically mention online payday loans.

The Federal Trade Commission has frequently pursued action against lenders charged with failure to disclose costs, violation of debt-collection practices or other alleged misdeeds. The Department of Justice has taken action against banks that provided electronic payment systems for online lenders making loans that were in violation of state laws. What the final outcome will be for online payday lenders remains to be seen, but with the federal government allied with the states, online payday loans may soon become a fond memory.

No Simple Answers for a Complex Issue

Most analysts believe that the issue of online payday loans is so complex that it will take several years — and likely numerous court cases — to resolve all of the nuances involved. If you would like to explore the topic in more detail, you can find helpful articles at the Personal Money Store.

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