A Philadelphia woman has filed a multi-million dollar class action lawsuit against a Utah-based lender that makes online payday loans through sites.

According to the suit, Direct Financial Solution of Utah has unlawfully charged Pennsylvania consumers interest rates in excess of 2000% APR and has violated the usury laws of the Commonwealth of Pennsylvania. The suit seeks to recover millions of dollars in illegal interest and to halt the allegedly unlawful loans.

Payday loans are short-term cash loans made to individuals who have poor credit and which require a deduction from the worker’s paycheck for repayment. The Center for Responsible Lending estimates the industry costs Americans $4.2 billion a year by charging exorbitant fees.

According to New Jersey attorney Steven Weisbrot, who is representing the plaintiff, the payday loan industry has migrated to the online marketplace after steps were taken to shut down their brick-and-mortar operations in Pennsylvania.

These companies victimize those who live paycheck to paycheck and “they should be downright ashamed of themselves for putting working class families into desperate financial situations,” Weisbrot said.

The suit seeks to enjoin the payday advance loan lender from preying on the Pennsylvania working class and to recover millions of dollars in damages on behalf of all consumers who have been forced to pay excessive interest rates to what Weisbrot calls “cyber loan sharks” and “blood suckers.”

The owners of Direct Financial Solution have been sued in many states and have agreed to repay millions to the thousands of customers who have paid usurious interest on those loans, Weisbrot said.

Lenders Fight Back
With the federal government sitting out the battle, states have been trying to shut down or at least curtail payday lending, but the industry has been fighting back, flooding state legislatures with lobbyists.

The cash advance online industry says it provides a service to low-income consumers with poor or no credit. Banks will not lend them money, industry backers say, so cash advance stores or payday lenders fill a critical need.

Critics counter that rather than providing a service, the payday lending industry is exploiting low-income consumers, trapping them in a spiral of debt. If a consumer borrows $100, a payday lender typically collects a fee of 15 percent, in this case $15.

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State Rep. Michael Thompson says it’s not the fees associated with South Carolina payday loans driving people into debt, it’s the number of loans they are taking out at one time.

Legislation that Rep. Thompson proposed this week would limit consumers’ borrowing to no more than $300 in 60 days and no more than six payday loans in a year. Cash advance companies also would have to grant customers a six-month repayment grace period with no charge and offer repayment plans to borrowers who can’t immediately pay back their loan.

“These things were never supposed to be a permanent fix in someone’s financial world,” Rep. Thompson said. “These were supposed to be a temporary fix for someone’s financial situation.”

House Bill 3831 would establish a statewide database to track consumers’ payday cash loans so borrowers couldn’t take loans from several different payday lenders at once.

Florida uses a similar database to regulate cash advance loans, Rep. Thompson said.

According to his bill, a fee of no more than $1 per loan would cover the cost of maintaining the database. The database would be established and operated by an outside company and the Board of Financial Institutions would oversee the system.

Companies that don’t comply with the faxless payday advance limits could face a $2,500 fine per South Carolina location, regardless of whether each store violated the law, according to the bill.

Payday lenders would have their license revoked for two years on the second offense. Consumer advocates are backing the measure, but industry representatives say it punishes responsible borrowers.

Jamie Fulmer, director of investor relations at Spartanburg-based Advance America, said his company is willing to work with legislators in creating “reasonable regulations.” But “arbitrary” caps aren’t an effective way to protect people who misuse their services, Mr. Fulmer said.

Without short-term, bad credit payday loan options, people are faced with paying bills late, bouncing a check or using an unregulated offshore Internet lender, he said.

James Wood, owner of Anderson Quick Cash, said his customers who rewrite loans do so because they are still working through a financial problem. But they stop coming in when they get back on their feet.

“The majority of customers, it’s not a lifelong thing like people think,” Mr. Wood said.

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Louisville businessman Bruce Lunsford, one of seven Democrats running for governor, said yesterday that he would press the legislature to crack down on the pay day loan and subprime mortgage industries if elected.

He said too many low-income people find themselves getting deeper in debt or risk losing their homes because of loans that carry very high interest rates or fees.

“Government hasn’t protected these people,” Lunsford said in a conference call with reporters.

John Rabenold, a spokesman for the Kentucky Deferred Deposit Association, said the no fax payday advance business already is regulated. He also said he isn’t aware of abuses in the industry, which offers short-term loans of up to $500 to people who are supposed to pay them back within 14 days.

“It’s a very convenient and confidential service customers have grown to appreciate in Kentucky,” he said.

However, the industry has attracted critics among some lawmakers and advocates who say payday and so-called “subprime,” or high-cost, mortgage loans prey on the poor and disadvantaged.

Bad credit payday loans are deceptive because many people don’t realize the true cost, said Ann Marie Reagan, a lawyer with the Kentucky Office of Legal Services, which has lobbied for tighter rules on such loans. State law allows lenders to charge up to $17.50 per $100, or $87.50 for a two-week loan of $500, she said.

That would amount to an annual interest rate of 459 percent if the loan were refinanced every two weeks over a year, Reagan said.

But Reagan said efforts to persuade lawmakers to impose additional restrictions on quick cash loans and sub-prime mortgage loans have failed in recent years amid intense industry opposition.

Lunsford said that if he’s elected, he will work to persuade lawmakers to enact tougher laws.

He said he wants to:

• Sharply reduce fees on payday loans and ban penalties for early payment
• Ban loan “flipping,” in which borrowers repeatedly refinance payday cash advances at high rates
• Ban excessive fees and penalties for paying off a mortgage early
• Prohibit mandatory arbitration, required in some loan contracts, which blocks people from filing lawsuits

Lunsford said a number of people raised concerns about the issue at a series of barbecue town meetings he and his running mate, Attorney General Greg Stumbo, have held around Kentucky.

He said it has nothing to do with the fact that one of his opponents in the May 22 Democratic primary, Lexington lawyer Steve Beshear, worked as the payday loan industry’s top lobbyist for several years in the late 1990s.

“I’ve done everything I can in this campaign not to address anyone else’s activities,” Lunsford said.

The crash of the subprime home mortgage market may have been a surprise to some, but all the warning signs were there. A business model where people are given loans that are likely to go into default, due to teaser rates and increasing payments over time, is bound to fail.

Rising home values in much of the country kept the bad credit home loan industry afloat for awhile, but now the weaknesses of the system are painfully clear. A system where an important part of the profit is based on closing loans — and not on the likelihood of the loans actually being repaid — is bound to crumble under the weight of the many brokers and lenders trying, in the short-term, to maximize the cash in their pockets.
Texas Payday Loan Changes: There’s not much that can be done to remedy the past poor judgments and predatory lending practices in the subprime home mortgage market. However, Texas has a chance to stop the proliferation of payday cash loan lending that targets the same customers — those with weak credit scores and not quite enough money to make ends meet.

Currently payday lenders charge, on average, 400 percent APR for two-week loans, and they are virtually unregulated in Texas. They can charge whatever they want because they are exploiting a loophole in a law designed to protect consumers against fraudulent credit repair businesses. Sadly, they have found a way to turn consumer protections into a means to avoid state interest rate limits and state regulation.

Regular and faxless payday loans are quite different from subprime home mortgage loans, but they share two crucial features: They charge exhorbitant interest rates, and they are loans that are designed to fail.

Payday lenders maximize their profits when borrowers cannot pay back loans and need to roll them over time after time, until they end up with a debt many times the amount borrowed. A recent study showed that payday lenders get 90 percent of their revenue from borrowers who are unable to pay back their loans in time.

The industry recently launched an ad campaign, pledging high market standards and warning that consumers should take out cash advance loans only in the event of an emergency. That may sound convincing at first blush, but it hides an agenda to legitimize a kind of lending that lures people into easy credit and ends up costing them many times the amount of the initial loan — creating what is often termed a “debt trap.”

The federal government decided last fall that payday loans are so dangerous to military families that they should be limited in their interest rate charges to 36 percent. However, payday lenders want new laws in Texas that make charging an effective annual interest rate of 400 percent on a two-week payday advance a state-sanctioned practice.

And, they don’t want to stop there.

They want an “out” built into their own legislation in case they decide to charge more. The proposed legislation maintains the loophole in Texas law that payday lenders have used to avoid all state interest rate limits and to side step federal banking guidelines related to payday lending.

We have a chance now to save Texas from falling into the same trap with faxless cash advance loans as the country encountered with subprime mortgages.

First, Texas must close the loophole that payday lenders are using to make loans at exhorbitant interest rates.

Second, no credit check payday loan lenders must be required to submit information about the loans they make in Texas to state regulators. This way, the state will have concrete information that can be used for clear policy making based on fact and not industry assertions of acceptable profitability.

Let’s take this opportunity and make good policy.

Author Jim George, an Austin attorney, is the chairman of Texas Appleseed, a nonprofit public interest law center.

Thanks to a bevy of unflattering media reports, there are probably few industries as vilified as the Arizona payday loan industry. Still, those who provide small, short-term loans offer a valuable service, and the government is wrong to trample on it.

The payday loan process is rather simple:

• A person in need of a small, short-term loan writes a check for the amount they need, plus a 15 percent fee. The check is usually dated two weeks in the future, at which time the loan (and the 15 percent fee) must be repaid in full. If the person is unable to pay, the payday advance loan lender “rolls over” the loan, charging the 15 percent fee all over again.

Most of the criticism of payday lenders has focused on the interest rates and the “rollover” mechanism. Over the course of a year, a payday lender’s interest rates can amount to an annual rate of 390 percent, while the rollover mechanism makes it exceptionally easy for uninformed customers to quickly become mired in debt.

So, several states have sought to curb what has been deemed a “predatory” business practice. According to The Wall Street Journal, lawmakers in New Mexico limited loan amounts to 25 percent of a customer’s monthly income, while Oregon is set to cap the amount of fees and interest faxless payday loan lenders can charge.

Here in Arizona, lawmakers have shied away from regulating payday lenders, but state Rep. Marian McClure, R-Tucson, is marshalling forces to put a proposition on the 2008 ballot that would effectively put the payday loan industry out of business. Telling the Arizona Daily Star that [fast payday loans] are “dangerous,” McClure wants the proposition to cap annual loan rates at 30 percent, which would likely put payday lenders out of business.

While the urge to protect customers from payday lenders might seem noble, closer inspection would suggest that it’s a bad idea.

What McClure and state legislators elsewhere fail to realize is that cash loan online lenders serve an important market: people who lack the assets to bank with mainstream banks like Bank of America or Wells Fargo. That’s a large group, one that includes people below the poverty level, at least some of the 12 million illegal immigrants in America and probably even a number of UA students.

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Three consumer groups said Thursday that a new Pentagon proposal aimed at cracking down on high-cost payday cash loans to military personnel was watered down and would allow many expensive products to continue.

This week, the Pentagon proposed a new rule that would prohibit certain payday loans, tax refund anticipation loans and loans made with someone’s vehicle as collateral.

But the Consumer Federation of America, the Center for Responsible Lending, and the National Consumer Law Center, urged the Department of Defense to apply restrictions more broadly to more types of cash advance payday loan advances.

The proposal includes “loopholes that will allow payday and other predatory lenders to tweak their products and continue trapping borrowers into high-cost loans,” the consumer groups said.

Thousands of military personnel have lost their military security clearance - limiting the work they can do - because of debt-related problems, and the Pentagon’s proposal is its most recent attempt to address this.

The Georgia General Assembly voted 82-77 March 27 to pass House Bill 163 allowing payday cash advance lenders to return to the state, but it wasn’t enough to advance the bill out of the house and effectively killed it for this legislative year.

The bill would have allowed loans up to $750 or 25 percent of the total monthly income to Georgia residents, charging $15 for every $100 borrowed. This bill also included a clause forbidding companies to make a loan to a military member or family member.

Although critics argue “predatory lending” has a negative impact on the lives of service members and Georgian citizens, opinions vary when it comes to the controversial issue of guaranteed payday loan lending. Last year, Congress imposed a 36 percent annual percentage rate cap on loans to military members and their dependants after reports showed the check cash advance industry had a negative impact on the financial lives of most military members who use these services.

Proponents of the services also known as payday advance loans or deferred presentment services argue most individuals using such services are not poor welfare recipients or the unemployed but are “… ordinary, hard-working people who simply need some short-term cash from time to time to help cover an unexpected or unbudgeted expense,” as stated by Joe Thrash in the March 27 edition of the Walker County Messenger.

Thrash claims bad credit cash loans are a necessary service that banks do not provide, and that payday loans are not predatory and may actually enhance the economic welfare of households as stated in a report by Donald Morgan of the Federal Reserve Bank of New York. That report examined whether the term “predatory lending” applies to legitimate check advance service providers.

“On the whole, our results seem consistent with the hypothesis that payday lending represents a legitimate increase in the supply of credit, not a contrived increase in credit demand,” stated Morgan. He further stated in the report that rates and fees would decrease proportionally as the number of lenders increased.

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With the Legislature’s failure to further regulate providers of payday advance loans for the fourth consecutive session, the battle over the constitutionality of the industry’s practices will shift back to the judicial branch this fall.

Legislation to cap check-cashers’ rates at the state usury limit and fine operators who charge more passed the House, but died in the Senate during the recently concluded regular session.

An industry-backed bill that critics said repeated reforms, such as banning rollover Arkansas payday loans, that are already law while doing nothing to limit lenders’ fees passed the Senate but died in the House.

With the stalemate, opponents said they would fall back on a 2003 lawsuit in their fight to end practices they say allow payday lenders to charge triple-digit rates for short-term cash loans, far exceeding the state’s 17 percent usury limit.

“This is such a clear cut, legal black and white issue. You can’t charge people 300 percent for credit in Arkansas under our constitution,” Arkadelphia lawyer Todd Turner, who represents plaintiffs in the lawsuit, said Tuesday.

In November, the state Supreme Court reversed a lower court’s finding that it lacked jurisdiction to decide the constitutionality of the 1999 Arkansas Check Cashers Act and sent the case back to Pulaski County Circuit Court. Circuit Judge Barry A. Sims is scheduled to hear the case again beginning Nov. 20.

“It’s been ripe to be decided since the day we filed the lawsuit,” Turner said.

The suit asks the judge to declare unconstitutional the 1999 act, which specifies that fees charged for pay day loans “shall not be deemed interest.” Charging interest above 17 percent would violate the constitution’s usury limit.

Until the issue is decided, payday advance lenders will continue to operate under the 8-year-old law.

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A Kanawha County Circuit Court judge has ordered 10 online payday loan lenders to produce documents subpoenaed by state Attorney General Darrell McGraw’s office.

Judge Paul Zakaib also ordered the lenders to stop making or collecting no fax payday loans in West Virginia until further notice.

Payday loans are short-term loans or cash advances, typically for 14 days, with high interest rates. Internet payday loans are secured by the consumer giving the lender permission to electronically debit the full amount owed, plus interest, from a personal checking account.

McGraw’s Consumer Protection Division began investigating these loan practices in 2005 after hearing that some companies were sidestepping West Virginia usury laws by providing loans online.

Agency officials say in some cases, consumers were charged annual percentage rates ranging from 600 percent to 800 percent, which is more than 44 times the maximum allowable rate of 18 percent APR for similar consumer loans in West Virginia.

Since the office began its investigation, it has reached settlement agreements with at least 17 Internet providers of payday advances. Agency officials say these settlements have resulted in $225,000 in refunds and canceled debts for more than 1,600 West Virginia consumers.

Assistant Attorney General Norman Googel said Zakaib granted the Attorney General’s petition in February, but there was a delay in getting it entered in writing.

The message on the brochure from Quad-Cities Interfaith couldn’t be more blunt. “Don’t get ripped off,” it says.

It also lists the names and contact information for five area banks and credit unions that offer small consumer loans with interest rates that are more reasonable than rates offered by payday advance lenders that have popped up throughout the Quad-Cities in recent years.

“These financial institutions will help you with your credit report, show you your interest rate up front and protect you from being charged an unreasonable and unnecessarily high interest rate.”

The brochure, in circulation for eight months, is one of at least two efforts at work in the area to help consumers see the cost of faxless payday loans that can have annual interest rates of hundreds of percentage points and can, if used to excess, lead to financial difficulties.

A task force formed by Interfaith that examined predatory lending practices in the Quad-Cities investigated payday lending after noticing an increase in the number of shops in the area, said Rita Cunningham, chairman of the group.

Area banks and credit unions were contacted and invited to meet and discuss how to let people know that they offer lower-interest alternatives to bad credit cash loans and can educate consumers about credit, its use and about developing healthy relationships with traditional financial institutions, Cunningham said.

“With payday loan offices popping up all over, we asked what this was about and why this was happening,” Cunningham said. “A lot of people are embarrassed to come forward and talk about their bad experiences with payday loans.”

Alcoa Employees & Community Credit Union offers a small consumer line of credit at 13.5 percent that consumers who qualify can draw against in $100 increments, said R. Dale Owen, vice president of lending. Alcoa is one of the five listed in the brochure.

Banks and credit unions offer small loans at interest rates far lower than payday loan offices but don’t tend to market them as heavily, Owen said. Those loans aren’t as profitable, but they do provide a service to the community and those who many need to borrow small sums.

The Iowa Credit Union League, a trade group for the state’s credit unions, is also working on legislation that would allow them to offer small loans in much the same way that no fax cash loan shops do, except that the annual percentage rate would be lower and there would be a consumer education component, Owen said.

QC DollarWise, an organization of 40 financial institutions and community-based groups, helps to coordinate financial literacy education and has pushed for greater access to that type of learning for the general public, said Lisa Ahern, a representative of the group.

“Last year, we looked at existing financial education in the Quad-Cities and found that to have access to it, 80 percent had to be a member of some financial institution or a recipient of some type of social program,” Ahern said.

QC DollarWise advocates for more availability of financial literacy education to greater numbers of people, regardless of whether they have bank accounts, are members of credit unions or are receiving some public benefit, Ahern said. One recommendation from the group asks that there be continued education about fast payday loan lending, other forms of sub-prime lending and alternatives to it.

“It’s about education, education, education,” Ahern said. “We want to do some kind of media campaign. You see all the commercials for payday lenders, but nothing to counteract that.”

SOURCE: The Quad City Times