Shawn Vestal: Formalized loan sharks are circling on Internet

Like everything, the payday loan industry has migrated to the Internet.

Some of that is doubtlessly the mere reality of modern technology. But some of it has come in response to attempts by state and federal regulators to crack down on the scummy practices of many lenders, who entrap people into “short-term” loans they cannot repay, sucking them dry with astronomical interest payments.

According to a new report from the Pew Charitable Trusts, this formalized loan-sharking has found friendly waters online, where the range of problems includes “consumer harassment, threats, dissemination of personal information, fraud, unauthorized accessing of checking accounts, and automated payments that do not reduce loan principal.”

Regulators in Washington and Idaho report similar issues – and they emphasize that borrowers can protect themselves by making sure they’re borrowing only from lenders who are licensed in their state.

The Pew report, part of a series on short-term, high-interest loans, concluded that a large percentage of such loans are now made online. Between 2006 and 2013, the value of loans originated online soared from $1.4 billion to $4.1 billion. Though the loans ostensibly are intended to be repaid quickly, they are often set up to require the payment of only interest and fees – automatic withdrawals of fees and interest scheduled each payday, without touching the principal. A full third of online loans follow this model. Calculated as annual percentage rates, the interest rates are as high as 700 percent.

The Sopranos have nothing on these usurers. The Pew report cited a typical example: A borrower takes out a $500 loan with five automatic installment payments that are interest-only. Five paydays later, the borrower making the minimum payment would have paid $875 in interest and fees, and still owe the entire $500 principal.

Clearly, these borrowers are not the savviest or ablest financial actors. But these lenders are operating out of a deeper kind of lack – a vast void of decency. The payday loan industry long has preyed upon the vulnerable and gullible, including the aggressive pursuit of borrowers in the military, and while states have taken some steps to regulate the industry, the worst parts of the industry are industrious indeed.

About a third of borrowers surveyed by Pew say they’d been threatened with arrest or contacting their employers by lenders trying to collect. A similar percentage said lenders had made unauthorized withdrawals from their bank accounts. Of all complaints made to the Better Business Bureau regarding payday loans, 90 percent involved online lenders, the Pew report said.

In Washington state, the Department of Financial Institutions investigates complaints about payday lenders. In 2013, 330 of 453 such complaints – or 73 percent – involved online lenders. Idaho has seen a similar dynamic.

Gavin Gee, director of the Idaho Department of Finance, said Idaho has taken a number of steps to crack down on predatory online lending. It requires such lenders to be licensed with the state, and loans made by unlicensed lenders are “null and void” – the borrower isn’t obliged to repay them.

Lenders “will make the argument, ‘Oh, we’re not subject to state law because we’re in India or Canada or whatever,’ ” Gee said. “That’s bogus. If they’re making loans to an Idaho resident, then they’re subject to Idaho law.”

One weakness of Idaho law is the absence of any limit on interest rates, and an earlier Pew survey found that borrowers in Idaho paid the highest interest rates for payday loans in the nation, at an average of 582 percent. In Washington, where the regulatory regime is much stricter, the average was 192.

Washington has driven down payday lending dramatically. In 2006, more than 3.5 million payday loans were made in the state; last year that figure was just above 871,000. Far fewer such lenders are in business, and the total number of such loans has plummeted. Washington law now puts limits on the number and amount of such loans and also caps interest rates.

It also requires licensing, as does Idaho. Washington’s licensing standards put lenders through regular examinations to ensure compliance, along with other protections for consumers.

“There is a segment of licensed online lenders that have an online component, and we really see few complaints with respect to that segment,” said Charles Clark, the enforcement chief for the Department of Financial Institutions. “Almost all the online payday lending complaints are against illegal and unlicensed companies.”