Alternative Finances

California Goes After Online Payday Lender Abuses

California will track consumers who take out payday loans and ban letting online payday lenders getting electronic access to customers’ bank accounts under a new regulatory proposal, according to American Banker.

The new rules would require payday lenders to secure loans with a paper check instead of electronic account access. That would make it much harder for online payday lenders to do business — but those lenders are typically much more expensive than storefront lenders and generate more fraud and abuse, and most online lenders don’t have state licenses, according to a 2014 Pew Charitable Trusts report.

A payday lender trade group, the California Financial Service Providers Association (CFSP), said the new rules “would have a high probability of forcing many or most” of its members out of the payday loan business. The group’s members are all state licensed, it said.

But a spokesman for the California Department of Business Oversight said that reducing online payday lending “may not necessarily be a bad thing.” The spokesman, Thomas Dresslar, added, “The more the scope of payment instruments expands beyond paper, the more dangerous the market becomes for consumers. It’s not the storefront operations that are the problem. It’s the activity on the Internet.”

The CSFP also asked for an extra six weeks to comment on the proposal. The current comment deadline is May 25.

“We’re surprised a state at the forefront of technology and innovation is asking consumers to revert back to paper checks,” Lisa McGreevy, president of the national trade group Online Lenders Alliance, told American Banker.

California’s efforts to target the most abuse-prone parts of its $3 billion-plus payday-lending industry are in line with an increasing trend to clean up payday lending rather than banning it, which could push borrowers to illegal sources of short-term loans and other unintended consequences.

Along with the paper-check requirement, California also plans to create a database for tracking individual consumers’ use of payday loans. Under current law, payday lenders can’t make a new loan to a California consumer who has an existing balance outstanding, but that’s very hard to enforce.

The new rules would require payday lenders to enter loan information into the state database and check it to make sure customers are eligible to get a loan. Florida, Illinois and other states already have similar databases.

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