Aug. 09--Unregulated online lending is a growing problem, experts say, and state and federal regulators are stepping up efforts to control it.
Loans available from unlicensed online lenders include short-term payday loans and installment loans of up to 10 years. Both can charge high interest rates, with fees and lengthy repayment terms. They are attractive to consumers in a pinch who think getting cash they need may be worth the cost.
Usury laws that put a cap -- 24 percent -- on how much interest lenders can charge in Pennsylvania have made predatory payday loans illegal in the state. But such loans have been made available to state residents from unlicensed Internet lenders.
State regulators last month reached a $1 million settlement stopping a California company from making and servicing such loans, which more than 18,600 Pennsylvania residents have taken out, said Ed Novak, a spokesman for the Department of Banking and Securities. The company charged interest rates ranging from 89 percent to 169 percent, exceeding state lending laws, Novak said.
Under the settlement, approved by the state Banking and Securities Commission, CashCall Inc. of Anaheim, Calif., its founder, a subsidiary and an affiliate, which offered the online loans without a state license, are banned from obtaining one for three years and must stop advertising loans in the state.
The $1 million settlement will be used for restitution to consumers and to repay the Banking Department's costs.
Online loans are a problem the department has been working to stop, Novak said. It previously reached undisclosed settlements with at least seven lenders, such as one last year with Credit Payment Services Inc. and its sites Paydaymax.com, Mycashnow.com and Igotit.com.
On its website on Friday, CashCall offered a $2,600, 47-month loan at a 204.94 percent annual percentage rate with a monthly payment of $431.49. That works out to total repayment of $20,280.03. But now, Pennsylvania residents are not eligible to make a loan, the site said.
Neil Barofsky, a New York attorney representing CashCall, and a spokesman did not return telephone messages for comment.
Online lending is a growing segment of the overall lending marketplace, and unlicensed lenders are part of it, said Tom Feltner with the Consumer Federation of America.
"There are about 80 websites we know of offering unlicensed lending. Half of the business is done by five of the sites who claim tribal sovereign immunity from state banking laws," Feltner said. Many sites operate legally, he said.
Lisa McGreevy, CEO of the Online Lenders Alliance, an industry trade group in Alexandria, Va., said most of its members have moved from two-week payday loans to longer-term products because of consumer demand. The trade group said federal regulations are needed because state rules "stifle innovation and deny consumers options."
Feltner said 23 states filed legal actions against online lender Western Sky Financial, which sold loans to CashCall. And Congress is considering the Safe Lending Act, introduced last year by Sen. Jeff Merkley, D-Oregon.
The scope of the online lending problem is unclear, Feltner said, because most cases go unreported to regulators.
"Online lending is rapidly growing and deserves ample regulatory attention," Consumer Financial Protection Bureau Director Richard Cordray said.
In December, the bureau filed a lawsuit against CashCall, subsidiary WS Funding LLC, affiliate Delbert Services Corp. and their owner, J. Paul Reddam, for collecting money consumers did not owe because loans violated license requirements or interest-rate caps in eight states.
Barofsky said "the charges against CashCall are without merit, (and) we will fight them in court," in a statement reported by other media.
The agency said CashCall and WS Funding in 2009 entered into an agreement with Western Sky in South Dakota. It claimed state laws did not apply to its business because it was based on an Indian reservation and was owned by a member of the Cheyenne River Sioux Tribe. The bureau said Western Sky was not exempt, and it has since ceased operations.
Its loans were acquired by WS Funding and serviced by CashCall, the CFPB said.
The Pennsylvania settlement requires CashCall to modify rates on outstanding loans to 6 percent, the lending cap under state law, and CashCall must ask credit reporting agencies to remove reports made by CashCall on consumers, Novak said.
The department received more than 100 complaints regarding CashCall.
"It's not unusual for us to hear about things like this from complaints, so consumers need to call us," Novak said.
The department is setting up a program to evaluate consumer claims against CashCall. Consumers can call toll-free 1-800-PA-BANKS (800-722-2657).
John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or email@example.com.
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