Internet payday lenders don't always play by the rules

Payday lenders increasingly have taken to the Internet to draw more consumers into high-cost, short-term loans.

But beware. Many neglect to get licensed in states where they solicit consumers, claiming that because they do not operate a storefront on a city street, they are not bound by that state’s rules.

As a result, many may try to evade consumer protection laws that regulate lending rates, say consumer groups and state regulators.

Kansas has been more aggressive than some other states in reining in the reach of Internet payday loans.

In a recent case with broad national implications, the Kansas banking commissioner’s office persuaded a federal judge that state regulators should have authority to impose consumer protection laws on Internet payday lenders, even when they do not have a physical presence in the state.

“The long and short of it is the federal court says we dohave authority to regulate these transactions,” said Kevin Glendening, administrator of consumer credit for the Kansas banking commissioner.

Because the case was in federal court, the decision carries more judicial weight that can influence other courts to rule in favor of a state’s ability to regulate Internet payday lending.

The decision allows Kansas to pursue a lawsuit seeking to force Utah-based Quik Payday Inc. to pay a $5 million fine and refund $445,000 in profits and interest to 972 Kansas consumers. A hearing date has not been set.

Quik Payday had taken the case to federal court to challenge the state’s authority and nullify the lawsuit.

Lawyers for the Internet lender did not respond to requests for comment. But because of the case’s precedent, and the dent it could make in industry profits, you can bet your mouse they’ll appeal.

The challenge Internet payday lenders pose is they open a headquarters in a state with lax lending laws and then charge those same high rates in states with tighter lending restrictions.

Kansas regulators claim Quik Payday made 3,000 loans to Kansas consumers that charged higher-than-allowed interest rates.

“The biggest concern is that Kansas has well-defined parameters in how they interact with consumers and the fees they charge,” Glendening said.

He differentiated Internet payday lenders from most storefront payday lenders that he said comply with state laws. He said Internet payday lenders now must play by the same rules.

“Many of the Internet companies have sought to use the Internet as a cover to avoid complying with state regulations,” he said.

A 2004 Consumer Federation of America study found a spike in abuses by payday lenders that moved online. The study said many operated without licenses or outside the United States.

The study said Internet loans ranged from $200 to $2,500, with $500 being the most frequent. Finance charges ranged from $10 per $100 borrowed — up to $30 per $100. Annual interest rates often reflected more than 650 percent.

Some Web sites, the study said, use confusing contracts and hidden clauses to automatically refinance loans and debit fees directly from a consumer’s bank account.

Consumer groups also say these transactions raise security issues because borrowers fill out online applications that often ask for Social Security and bank account numbers. “These financial transactions expose consumers to identity theft and loss of privacy and control over personal information,” the study said.

Quik Payday claimed in its arguments that because it was a Utah company, it did not have a physical presence in Kansas.

Source:http://www.kansascity.com/business/story/275886.html