It all started with three parking tickets.
Robert Bradley, of Jamaica, Queens, a 64-year-old hospital worker, had been low on cash and neglected to pay the first ticket, then the second — and soon he was worried that his car would get towed. "I took out a payday loan thinking that would solve the problem," he says. He started with a single loan for $300 from PDL Loans, also known as Piggy Bank Cash Loans. The company's address is in Nevis, West Indies, but Bradley easily found it on the Internet. Then, as now, the site promised rapid approval — and money in his checking account in a matter of hours.
That was in June of 2010. As is often the case with payday borrowers, Bradley's finances were already fragile. He was focused on the cash he needed then, not the consequences he'd face later. He paid off the first loan on July 9 — $390 for a $300 loan — and took out another $350 on July 28 with the same lender. This time PDL seemed to withdraw payments from his account at random, and never enough to pay off the loan. As costs for that loan ballooned, he needed even more money. He took out a third loan in August, which led to two more in September. By December he had taken out a total of 11 loans from 10 different online lenders.
Bradley thought each loan would be straightforward. "It was supposed to be a one-shot deal," he says. "I got the money in one shot, I'm gonna pay it off in one shot. It wasn't supposed to go on month after month." Bradley, who received his paycheck via direct deposit, expected each lender to electronically deduct the full balance of his loan from his checking account two weeks after the loan was made. But by his account, based on a review of his bank records, each lender withdrew less than the full amount of the loan, making successive deductions that were never enough to bring his balances to zero. To Bradley, the withdrawals had no rhyme or reason, and they had the effect of pushing him further into the hole as fees, penalties, and interest piled up.
"They were taking just the interest, then they would come back and do the same thing [again]," he says. "They didn't touch principle."
One by one, as he got behind, the calls started coming in: He'd paid $880 on a $300 loan from AmeriLoan Credit, but the lender said he still owed $550. He'd paid $1,225 on a $500 loan from Advance Me Today, which had PO Box in San Jose, Costa Rica — its Website no longer lists one — but the lender claimed he owed another $550.
By January 2011, US Fast Cash Credit, owned by AMG Services Inc., a corporation chartered by the Miami Tribe of Oklahoma, wanted $250 more after he'd already paid $945 on a $400 loan. GECC Loan (also doing business as Cash Direct Express), CCS Loan Disbursement (also doing business as Community Credit Services), Sure Advance Loan, Tior Capital, Loan Shop, and My Cash Now were all calling him at home and at work, though he never reached anyone who could answer questions about his accounts. By February, he had borrowed a total of $4,445 and had paid back $8,240. Altogether, his lenders said still he owed another $4,134.
By the time Bradley sought help to escape his snowballing financial disaster, he had closed his checking account, destroying a 20-year relationship with his bank. "I had nothing against the bank," he says. "I just wanted to stop these electronic withdrawals that weren't going to pay off the loan. And the bank was taking out fees when the loan payments didn't go through."
It was a paralegal at the Neighborhood Economic Development Advocacy Project (NEDAP) in Manhattan, an advocacy group that opposes predatory lending, who finally told Bradley that none of these lenders should have been able to charge Bradley such high rates or touch the money in his bank account. Payday loans are illegal in New York State.
An elusive industry for regulators
According to the Consumer Federation of America, only 18 states ban or strictly regulate payday loans. New York's ban is one of the nation's toughest. Whether they're made online or at a strip mall, loans with triple-digit APRs (annual percentage rates) violate the state's 1976 usury law, which caps rates at 16 percent. The state lacks the power to regulate commercial banks — such as Bank of America, Chase, and Wells Fargo — who are overseen at the federal level and allowed to charge 29 percent or more on credit cards. But payday lenders are considered non-banks, so licensing and regulation fall to the states. Any non-bank lender who charges more than 16 percent interest in New York is subject to civil prosecution; charging above 25 percent can subject lenders to criminal penalties. First-degree criminal usury is a Class C felony that carries a maximum sentence of 15 years.
In 2004, when Elliot Spitzer, then attorney general, discovered that lenders were circumventing the state law by lending on-line, he sued one of the lenders, Las Vegas-based Cashback Payday Loans, and shut down servers in the state that had been throwing up payday loan Websites, forcing Cashback to pay restitution to customers. In 2009, a year before Bradley got his first Internet payday loan, then-attorney general Andrew Cuomo settled with County Bank of Rehoboth Beach, Delaware, which let Pennsylvania-based Internet payday lenders Telecash and Cashnet use its bank charter to make Internet payday loans in New York. A $5.2 million settlement was distributed to more than 14,000 New Yorkers who had taken out their online loans, with some burned borrowers receiving more than $4,000.
Despite the successive lawsuits, Internet payday loan companies never stopped lending to New Yorkers. Consumer advocates and state regulators alike say that Robert Bradley's experience is hardly unique. "The use of the Internet to evade New York's strong consumer protections against payday lending and its exorbitantly high interest rates is a serious concern," says Benjamin Lawsky, the state's superintendent of financial services. "Payday lenders should know that making loans to New Yorkers puts them at risk of prosecution and that they have no legal right to collect on any loans they make here."
Payday loans, whether made by storefronts or on the Internet, are defined by their relatively small dollar amounts and excessive annual percentage rates (APRs), which routinely run to three and four digits. Bradley's first loan, for example, with a $90 fee on a $300 two-week loan, was the equivalent of a 782 APR, according to payday loan interest calculators.
Payday lenders first surfaced at check-cashing stores in the South and Midwest about twenty years ago, and remained regional enterprises throughout the 1990s.
By 2003, there were only about 3,000 payday storefronts in the entire country. Today there are around 20,000.
The number of Internet lenders is smaller, but then again a single Website can reach many more people than a storefront can. In a January 2012 report, San Francisco based JMP Securities analyst Kyle Joseph, an expert on the industry, put the number in the hundreds. Jean Ann Fox, director of consumer protection at the Consumer Federation of America, says estimates range from 150 to 250 Internet payday lenders operating nationwide. Peter Barden, a spokesperson for the Online Lenders Alliance, an Alexandria, Virginia–based trade organization representing Internet lenders, says his organization has over 100 members, and that "a reliable industry estimate" on the number of lenders is 150.
John Hecht, in a January report for the San Francisco-based investment bank JMP Securities, found that 35 percent of all payday loans were made on the Internet in 2010. Hecht, now an analyst at Little Rock investment bank Stephens Inc., believes market share will likely reach 60 percent by 2016.
Like storefront lenders, online lenders state prominently that they don't check credit scores — part of a strategy to market to those with tarnished credit. PDL Loans, for example, Bradley's first lender, proclaims, "Bad or no credit ok" ; another of Bradley's lenders, US Fast Cash, says, "Even bankruptcy, bounced checks, charge-offs and other credit hassles don't prevent you from getting the cash advance you need!"
And lenders typically tout the speed with which loans are closed. AmeriLoan, another of Bradley's lenders, says, "It's easy to get the funds you need in seconds" ; PDL Loans offers a "3 minute application" and "instant approval." Virtually all promise to deposit the loan to your checking account by the next business day.
The places where payday loans are banned or tightly regulated — Arizona, Arkansas, Colorado, Connecticut, Georgia, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont, Washington, DC, and West Virginia — are home to some 60 million people who are old enough to get a payday loan, a market that the Internet lenders seem to believe is worth tapping. Advance America, the largest publicly traded payday lender, and Cash America, the second largest, both make payday loans online. While opening a store in a state with a payday ban is too conspicuous to be practical, the Internet is a good place to hide.