State authorities are boosting their efforts to protect vulnerable Americans from short-term, costly loans that can have interest rates above 300 percent annually. Most recently, Illinois Attorney General Lisa Madigan filed a lawsuit against All Credit Lenders, accusing the company of misleading borrowers into taking out expensive loans with useless insurance products. The loans' added fees for payment protections were, in fact, a way to inflate loan payments and skirt the state’s 36 percent cap on interest rates. The lawsuit said borrowers making the monthly minimum payments only covered the interest and the mandatory maintenance fee charged each month.
The lawsuit is the latest in a broader effort to crack down on payday lenders. It also offers a new view of the conflict between state authorities and lenders. Some lenders are finding innovative ways to avoid state usury laws, such as by tacking on fees that are not technically part of the interest rates. Others alter their loan terms to fall just outside state definitions of payday loans, or close their storefronts to operate online.
The Consumer Financial Protection Bureau (CFPB) is investigating several U.S. short-term lenders. In a filing with the Securities and Exchange Commission last week, the World Acceptance Corporation disclosed that it was under investigation by the CFPB for potential violations of consumer protection and fair lending laws. Regulators in at least 21 states are also focusing on lenders tied to Native American tribes that claim they are part of the “sovereign nation” that exempts them from federal and state laws. The CFPB and New York State are also pursuing lead-generating websites that provide lenders with sensitive financial information that helps them gain access to new borrowers.