Although regulators and consumer advocates have worked for years to curtail payday lending, more and more firms are moving the business to the Web -- raising new policy challenges and threatening consumer protections at the state level, writes Tom Feltner of the Consumer Federation of America. Policymakers and consumer advocates should work to prevent online lenders from circumventing state laws, argues Feltner -- the group's director of financial services -- and ensure that banks do not aid them in doing so.
When applying for an online payday loan, borrowers provides personal information such as social security numbers, employment history, monthly income, and bank account numbers. Borrowers authorize lenders to make electronic deposits to and withdrawals from their bank accounts, which can create serious problems. Consumers have complained that collectors harass them at work, or that lenders make repeated attempts to debit the same payment, triggering account overdraft fees. Also, these payments often lack fraud-prevention safeguards.
The Consumer Financial Protection Bureau recently announced that it is researching the online lending industry and initiated a separate inquiry into practices at online lenders that claim tribal sovereign immunity from state laws for their connections with Native American tribes. Last spring, Democratic Sen. Jeff Merkley of Oregon introduced the Stopping Abuse and Fraud in Electronic Lending Act of 2013, which would require all lenders -- including those operating online -- to comply with state consumer protections. The bill also would restrict the use of remotely created checks -- which are generated by lenders and not endorsed by borrowers -- and prohibit the use of "lead generators" that collect consumer employment and bank account information to sell to the online lenders.