Consumers at Risk from Online Payday Lending CFA Survey of 100 Internet Payday Loan Sites

November 30, 2004
Jean Ann Fox, CFA, 202-387-6121
Jack Gillis, CFA, 202-737-0766

Washington, DC --- According to a Consumer Federation of America (CFA) survey of one hundred Internet payday loan sites, small loans involving electronic access to consumers' checking accounts pose high risks to consumers who borrow money by transmitting personal financial information via the Internet.

 "Internet payday loans cost up to $30 per $100 borrowed and must be repaid or refinanced by the borrower's next payday," said Jean Ann Fox, CFA's director of consumer protection. "If payday is in two weeks, a $500 loan costs $150, and $650 will be electronically withdrawn from the borrower's checking account."

 Many surveyed lenders automatically renew loans by electronically withdrawing the finance charge from the consumer's checking account every payday. If consumers fail to have enough money on deposit to cover the finance charge or repayment, both the payday lender and the bank will impose insufficient funds fees.

 Online payday loans are marketed through e-mail, online search, paid ads, and referrals. Typically, a consumer fills out an online application form or faxes a completed application that requests personal information, bank account numbers, Social Security Numbers and employer information. Borrowers fax copies of a check, a recent bank statement, and signed paperwork. The loan is direct deposited into the consumer's checking account and loan payment or the finance charge is electronically withdrawn on the borrower's next payday.

 "Internet payday loans are dangerous for cash-strapped consumers," stated Ms. Fox. "They combine the high costs and collection risks of check-based payday loans with security risks of sending bank account numbers and Social Security Numbers over web links to unknown lenders."

 Survey of Internet Payday Loan Sites

 CFA surveyed a sample of one hundred Internet payday loan web sites. Fifty-eight sites appear to be lenders, while forty-two were referral sites that link borrowers to other lenders. The survey collected information on loan costs and terms, information available on the web site, contract terms, and the identity and regulatory status of the lender.

 Survey Findings

 Loan Terms: Loans from $200 to $2,500 were available, with $500 the most frequently offered. Finance charges ranged from $10 per $100 up to $30 per $100 borrowed. The most frequent rate was $25 per $100, or 650% annual interest rate (APR) if the loan is repaid in two weeks. Typically loans are due on the borrower's next payday which can be a shorter term.

 Cost Information: Only 38 sites disclosed the annual interest rates for loans prior to customers completing the application process, while 57 sites quoted the finance charge. The most frequently posted APR was 652%, followed by 780%.

Repayment Terms: Although loans are due on the borrower's next payday, many surveyed sites automatically renew the loan, withdrawing the finance charge from the borrower's bank account and extending the loan for another pay cycle. Sixty-five of the surveyed sites permit loan renewals with no reduction in principal. At some lenders, consumers have to take additional steps to actually repay the loan. After several renewals, some lenders require borrowers to reduce the loan principal with each renewal.

 Unfair contract terms: Contracts from Internet payday lenders include a range of one-sided terms, such as mandatory arbitration clauses, agreements not to participate in class action lawsuits, and agreements not to file for bankruptcy. Some lenders require applicants to agree to keep their bank accounts open until loans are repaid. Others ask for "voluntary" wage assignments even in states where wage assignments are not legal.

 Privacy and security: Eighteen sites did not post a privacy policy. The policies used by many lenders authorize information sharing for third party marketing purposes. The only way a consumer could opt-out of information sharing at a major lender was simply not to apply. Twenty-eight sites failed to have secure connections on application pages that collected personal financial information.

 Contact information: Less than half of surveyed lenders provided a physical address or a phone number. Seventy three sites provide contact through e-mail or online contact with lenders. Almost one-fourth of survey lenders listed no contact information of any kind.

 Lender identification: The survey revealed that online borrowers are often operating in the dark about the identity, location, or ultimate lender. Some sites are registered through anonymous domain registries. Consumers click through several URLs in the process of using some sites, making it easy to lose track of the actual lender. Surveyors encountered a confusing mix of names and addresses on web sites, loan documents, and domain registries.

 Electronic Debit Rules Apply to Internet Borrowing

 Internet payday loans are delivered and collected through the Automated Clearing House System (ACH), the same network of banks and processors used when consumers pay by debit card. The Federal Electronic Fund Transfers Act (Regulation E of the Federal Reserve) and industry self-regulatory rules for ACH transactions give consumers protections and rights when withdrawals are unauthorized or fraudulent. However, rules written for preauthorized debits of routine payments, such as a monthly mortgage or insurance bills, do not easily fit payday loan transactions, especially when a borrower wants to stop repeated attempts to collect a loan when funds are not available.

 Internet Lenders Evade State Protections

 "Internet payday lending is the latest tactic to evade state small loan consumer protections. Lenders, when they can be located, are clustered in states with lax or non-existent consumer protections or claim to be doing business from outside the United States," Fox stated. "These companies ignore interest rate caps and small loan laws of the states where their customers get loans."

 CFA surveyors could confirm that only twenty lenders out of one hundred surveyed were licensed in their home states, while twenty-eight sites stated a choice of law, naming nine states and three foreign countries. Delaware and Nevada were listed by six sites each, followed by California, New Mexico, and Utah. With the exception of California, none of these states cap the cost of payday loans.

Some sites claimed that loans were not available to consumers in a handful of states, but loans were routinely offered to consumers located in states where payday loans are illegal and at terms that exceeded limits of some state payday loan laws.

 States Take Action against Internet Payday Lenders

 State regulators in Kansas, New York, and Colorado are in the lead on enforcing their state credit laws with Internet payday lenders making loans to consumers in their states. The Kansas Banking Commissioner settled cases with some unlicensed lenders and has a case pending against United Cash Loans, based in Nevada. The New York Attorney

 General's office settled a case against a Los Vegas Internet lender, citing New York's civil 16% usury cap and its 25% criminal interest rate cap. Last week, Colorado's Attorney General issued cease and desist advisories to three unlicensed Internet payday lenders -- Cash Advance and Preferred Cash Loans of Carson City, NV and Quik Payday Inc. in Utah.

 Advice to Consumers

 CFA advises consumers not to borrow money based on giving a post-dated paper check or electronic access to a bank account as security. Payday loans are too expensive and too hard to repay on the next payday. CFA advises consumers never to transmit bank account numbers, Social Security numbers or other personal financial information via the Internet or by fax to unknown companies. Consumers should shop for lower cost credit, comparing both the dollar finance charge and the APR to get the lowest cost credit available. For help with financial problems, CFA urges consumers to seek credit counseling help or legal assistance.

 CFA also urges consumers to report problems with Internet payday lenders to their state credit regulators or Attorney General's office.

 The full report, "Internet Payday Lending: How High-Priced Lenders Use the Internet to Mire Borrowers in Debt and Evade State Consumer Protections," is posted at

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 Consumer Federation of America (CFA) is a non-profit association of almost 300 pro-consumer groups, with a combined membership of 50 million, which was founded in 1968 to advance the consumer interest through advocacy and education.