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Online Payday Loans Cost More, Result In More Complaints Than …

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Online Payday Loans Cost More, Result In More Complaints Than Loans From Sketchy Storefronts

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October 2, 2014 By

We understand why someone might opt for getting a payday loan online instead of doing it in person. It’s easier, faster, doesn’t require going to a shady-looking storefront operation where some trained fast-talking huckster might try to upsell you unnecessary add-ons or tack on illegal insurance policies. But the truth is that people who get their payday loans online often end up in a worse situation than they would have if they’d applied in person.

This is according to a new study [PDF] from the Pew Charitable Trusts on the topic of online payday loans.

For those unfamiliar with payday lending, it generally works like this: A borrower needs a relatively small amount of cash — usually a few hundred dollars — and takes out a loan with a repayment window of usually around 10-14 days. At the end of that term, the borrower is supposed to pay back the amount borrowed plus a lump-sum fee that often equates to an annual percentage rate over 100%.

WHAT’S 650% INTEREST BETWEEN FRIENDS?

According to the report, the typical storefront payday loan would charge a fee of around $55 for a $375 loan. That’s an APR of around 390%. While that’s astounding, it’s nothing compared to the $95 lump-sum fee that you’d pay for the same loan from an online; that’s an APR of more than 650%.

Payday loans can also be taken out as installment loans, in which the borrower pays back the principal and fees in smaller amounts over a slightly longer time period. Even then, online loans cost significantly more than storefront offerings, according to the study.

Your typical storefront installment loan will hit borrowers with an APR of around 300%, while online lenders charge upwards of 700%.

BREAKING DOWN BOUNDARIES

Of course, this will vary by lender and by state, as a number of states put limits on the maximum APRs of loans. More than a dozen states either outlaw payday lending outright or have such strict lending limits so as to make it not worth the effort for lenders.

But state laws don’t always stop online payday lenders from offering their pricey loans where they shouldn’t. This past summer, a web of online payday operations were indicted for making loans with triple-digit APRs to residents of New York, in violation of the state’s usury laws.

New York also sent cease and desist orders to dozens of online payday lenders operating from Native American reservations, saying that tribal affiliation does not give a lender the authority to break other state’s laws.

There are several apparent reasons that online payday loans cost more than storefront options. The primary driving force of the higher APRs is the higher rate of defaults and losses for online lenders. The Pew study found that the typical storefront operation needs to use about 17% of its revenue to cover losses, while 44% of what an online lender takes in goes to cover its losses.

Additionally, while storefront operations generally spend minimal money on advertising, online payday lenders spend a significant amount of cash on buying online search terms and lead generation.

SOAK, RINSE, REPEAT

With this risk, it means that online lenders have a more pressing need for borrowers who need to take out repeat loans to cover previous loans.

Even charging a 650% APR, an online lender may need a borrower to re-up his loan three times before seeing a profit.

Thus, some online lenders are pushing borrowers into loans where the only amount deducted each payday is the lender’s fee. That means the principal of the loan does not go down, and the loan is just re-upped for another couple of weeks.

One-in-three online borrowers that Pew researchers surveyed were put into a plan of this sort. And of that group, more than half had to actually call the lender to request that more than the fee be deducted.

Websites for these lenders make this sound like a borrower-friendly idea, with statements like “Online customers are automatically renewed every pay period. Just let us know when you are ready to pay in full, and we will deduct your loan plus fees from your bank account.”

If you borrow $375 with a per-term fee of $95, this lender will keep taking that $95 every two weeks until you can repay the $375 PLUS the latest $95 fee. So repaying the loan after six weeks means you would have paid $660 for a $375 loan.

DUDE, WHERE’S MY MONEY?

The Pew report also found that online lenders were twice as likely to make withdrawals that result in overdrafts for borrowers. Only about 1/4 of borrowers say this had happened to them with storefront payday lenders, while nearly 1/2 of online borrowers had experienced this problem.

“I got in a situation where people were taking money out of my account without me knowing,” says one borrower quoted in the report, “and they were taking money out, just kept taking extra money out. … I didn’t know nothing about it, but my bank stopped them. … They were like, ‘You’re having all this money coming out, and you don’t have this money in your account, so what’s going on here?’ … I had to switch banks.”

One-in-three online borrowers also reported unauthorized withdrawals from their bank accounts, while another 20% say they received a loan or payment that they did not apply for or authorize.

At the request of the Federal Trade Commission, a court recently shut down a network of payday lenders that was using info from payday lead generators to allegedly dole out unauthorized loans and then start helping themselves to fees from those same bank accounts.

30% of online payday borrowers say they had received at least one type of threat — whether it be the dangling sword of arrest, or claims that the borrower’s family or employer would be contacted about the debt:

SO FEW LENDERS, SO MANY COMPLAINTS

Looking at this info, it may not surprise you that while online payday lenders only account for about 30% of the market, they make up nearly 90% of the payday-related complaints filed with the Better Business Bureau.

And one single business — AMG Services — accounted for nearly 33% of all these complaints. You might remember AMG from its two-year-long legal battle with the FTC, or the fact that I dubbed it one of the scammiest payday lenders I’d ever come across.

October 2, 2014 By

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[…]

The Skanner Newspaper – Consumer Finance Protection Bureau Slaps Payday Lender ACE Cash Express With $10 Million Fine

For the second time in as many years, the Consumer Financial Protection Bureau (CFPB) has fined a major payday lender. On July 10, Director Richard Cordray announced that one of the nation’s largest payday lenders, ACE Cash Express, will pay $10 million in restitution and penalties for directing its employees to “create a sense of urgency” when contacting delinquent borrowers. This abusive tactic was used to perpetuate the payday loan debt trap.

CFPB has ordered ACE Cash Express to provide consumers with $5 million in refunds and the same amount in penalties for its violations. The firm operates in 36 states and in the District of Columbia with 1,500 storefronts, 5,000 associates and online loans.

“We believe that ACE’s aggressive tactics were part of a culture of coercion aimed at pressuring payday borrowers into debt traps,” said Cordray. “Our investigation uncovered a graphic in ACE’s training manual that lays out a step-by-step loan and collection process that can ensnare consumers in a cycle of debt. When borrowers could not pay back their loans, ACE would subject them to illegal debt collection threats and harassment.”

Commenting on CFPB’s actions, Mike Calhoun, president of the Center for Responsible Lending, said, “This enforcement action also confirms what our research found long ago: payday lenders depend on keeping vulnerable consumers trapped in an endless cycle of debt of 300-400 percent interest loans. . . .It’s real, it’s abusive and it’s time to stop.”

CRL research shows that payday loans drain $3.4 billion a year from consumers. Further, CRL has long held that the payday industry preys on customers who cannot repay their loans.

Now, with CFPB releasing an item from ACE Cash Express’ training manual, that contention is proven to be true. The ACE graphic shows how the business model intends to create a debt cycle that becomes increasingly difficult to break and urges its associates to be aggressive.

Across the country, the South has the highest concentration of payday loan stores and accounts for 60 percent of total payday lending fees. Missouri is the only state outside of the South with a comparable concentration of payday stores.

Last year, another large payday lender, the Fort Worth-based Cash America International, faced similar enforcement actions when CFPB ordered it to pay $5 million in fines for robo-signing court documents submitted in debt collection lawsuits. Cash America also paid $14 million to consumers through one of its more than 900 locations throughout the United States, Mexico and the United Kingdom.

On the same day that the CFPB’s enforcement action occurred, another key payday- related development occurred.

Missouri Gov. “Jay” Nixon vetoed a bill that purported to be payday reform. In part, Gov. Nixon’s veto letter states, “allowing payday lenders to charge 912.5 percent for a 14-day loan is not true reform. . . Supporters point to the prohibition of loan rollovers; but missing from the legislation is anything to address the unfortunately all-too-common situation where someone living paycheck-to-paycheck is offered multiple loans by multiple lenders at the same time or is encouraged to take out back-to-back loans from the same lender. . . .This bill cannot be called meaningful reform and does not receive my approval.”

Speaking in support of Gov. Nixon’s veto, Pastor Lloyd Fields of Kansas City added, “The faith community applauds Governor Nixon’s moral leadership in holding lawmakers to a higher standard on payday lending reform. Missourians deserve nothing less.”

On the following day, July 11, the Federal Trade Commission (FTC) fined a Florida-based payday loan ‘broker’ $6.2 million in ill-gotten gains. According to FTC, the firm falsely promised to help consumers get payday loans. After promising consumers to assist them in securing a loan in as little as an hour, consumers shared their personal financial data. However that information was instead used to take money from consumers’ bank accounts and without their consent.

Speaking on behalf of the FTC, Jessica Rich, director of FTC’s Bureau of Consumer Protection, said, “These defendants deceived consumers to get their sensitive financial data and used it to take their money. The FTC will continue putting a stop to these kinds of illegal practices.”

Looking forward, CFPB’s Cordray also sees a need to remain watchful of payday developments.

“Debt collection tactics such as harassment and bullying take a profound toll on people – both financially and emotionally”, said Cordray. “The Consumer Bureau bears an important responsibility to stand up for those who are being wronged in this process.”

Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.

[…]

Payday loan case reveals brutal interest rates | Wichita Eagle

Tiffany Kelker was stuck.

In January 2011, finding herself in need of some financial assistance after the holidays, she had taken out a $600 “payday loan” from an online lending business that advertised fast cash.

In the ensuing months, however, the Billings, Mont., mother of five watched as the company withdrew money electronically from her bank account, according to court documents. Eventually the lender took more than $1,800 in interest charges alone, which court records calculated as an annual percentage rate of 780 percent.

Kelker would eventually file suit against Geneva Roth Ventures Inc., an Internet-based lending operation headquartered in Mission, Kan.

The Montana case was only the latest in a collection of legal issues involving Geneva Roth and its CEO, Mark Curry. Several other states already had barred the company from doing business, according to court records.

The Montana case highlights the controversial tactics such companies use – and the increased scrutiny their tactics have attracted from state and federal agencies.

“Payday lending is right up there among our top issues,” said Nikhil Singhvi, staff attorney for the Federal Trade Commission.

Those companies that make up the industry can be hard to track.

The office listed on Kansas paperwork as the Geneva Roth headquarters in Mission features no sign in front, although state records still list it as an active company.

Despite multiple attempts, Curry could not be reached for comment for this story. Curry’s Montana lawyer issued a statement on his behalf, however, saying Geneva Roth is no longer in business and was happy to resolve the Montana case.

‘Wild West mentality’

Whatever the status of Geneva Roth, Curry established himself as a significant figure within the industry. He was an early member of the Online Lenders Alliance, a group founded in 2005 purportedly to serve as a kind of industry watchdog.

The goal of the alliance, according to its website, is “to protect the industry against potential damage caused by inept lenders.”

“Like many new Internet industries, it can be a little bit of a Wild West mentality,” said Peter Barden, a spokesman for the alliance. “And the folks that brought it together wanted to create some really good rules based on integrity, with the focus on the consumer.”

But while industry proponents argue that online payday lenders offer an important and quick form of financial relief not available elsewhere, critics accuse these companies of charging exorbitant interest rates, failing to adequately inform consumers about fees and trapping vulnerable individuals.

In recent years, numerous state agencies have joined the Consumer Financial Protection Bureau and FTC to crack down on predatory lenders.

In Arkansas, for instance, Geneva Roth agreed to pay $60,000 to the attorney general’s office after the state argued that the company’s annual interest rate for its customers ranged from 364 percent to 1,365 percent – exponentially higher than the 17 percent loan interest rate the state’s constitution allows.

(Although the defendants – Geneva Roth Capital Inc., Geneva Roth Ventures Inc., LoanPointUSA.com and Curry – denied violating any Arkansas laws, they agreed to stop doing business in the state. In this lawsuit, as in others, Geneva Roth was listed as doing business as LoanPoint.)

Kansas officials said they had received no complaints against Geneva Roth, and complaints in Missouri are not public record.

But in Connecticut, a cease-and-desist order issued by the state banking commissioner accused Geneva Roth of charging multiple customers interest rates in excess of 700 percent. Other states – including California, Indiana, Oregon and Washington – also have banned Geneva Roth from doing business within their boundaries.

And then there was Kelker’s case in Montana.

As loan payments were continually taken from her bank account, Kelker fell behind on other bills. Unsure what to do, she found herself locked in a nightmarish situation.

“I thought, how am I going to get these people off my back?” Kelker said. “Because it just felt like there was no end to the madness. I was paying them and paying them and paying them, but there was just no end.”

After a meeting with a consumer credit counselor aimed at managing some of her debt, Kelker was referred to Montana-based attorney John Heenan, who agreed to take her case pro bono.

The case would later grow into a class action lawsuit that included more than 380 Montana residents.

In court filings, Geneva Roth denied Kelker’s allegations, adding that because any loans were made outside the state of Montana, the claims didn’t fall under state law.

In the end, however, the company agreed to forgive outstanding debts, according to court documents, and Heenan said that totaled hundreds of thousands of dollars. Curry’s company also agreed to pay a $233,000 settlement, most of which was dispersed among the plaintiffs, and cease business dealings in Montana unless it registers with the state, according to court records.

Heenan describes the online lending industry as a “cat and mouse” game, with some lenders going to great lengths to remain a step ahead of regulators. Some, for instance, have moved into Native American tribal jurisdictions or overseas as a way to avoid prosecution. Others operate under a variety of names in an effort to make their companies’ dealings difficult to track.

And unlike storefront lenders, which feature concrete business locations, online lenders often work in the shadows of the Internet.

“That can add a level of complexity for the consumer that a storefront won’t have,” said Singhvi of the FTC, which has reached settlements with some companies stemming from alleged deceptive practices. “Because a consumer can very easily go back to a store and resolve any consumer complaint face to face.”

Finding the players

Tucked into suburban Johnson County, the building listed on a state business filing as Geneva Roth Ventures Inc. sits on a quiet residential street, not far from a Target and a collection of fast-food restaurants. The building itself is rather unremarkable – unlike other nearby businesses, there are no signs indicating what services it might offer.

“I don’t know what they do,” said an employee at a neighboring business. “I don’t know if they’re a call center or what.”

On a recent weekday, a receptionist at the building told a Star reporter that Curry was unavailable. Another employee offered to take the reporter’s information, although the message would go unreturned.

A week later, an employee arrived at the locked front door to greet a visitor.

Asked what company was operating out of the building, she initially declined to answer.

But when asked whether it was, in fact, Geneva Roth, she quickly said no.

“This is MacFarlane Group,” she replied.

Nevada records list Curry as secretary and treasurer of the MacFarlane Group. On its website, the company describes itself as being “dedicated to helping businesses succeed” and lists information technology and analytics among its services.

In an e-mail, Peter Habein, the Montana attorney who represented Curry and Geneva Roth in the Kelker case, said Geneva Roth is no longer in business.

Tracking the whereabouts of Curry himself can also be difficult.

In business filings with the state of Kansas, Curry lists a Puerto Rico address. He also has ties to Nevada, hosting a party there in 2012 for a local charity that featured a Monopoly theme and scantily clad women dressed as police officers, according to media reports.

And in multiple attempts to have Curry served with the lawsuit in Montana, Heenan was unsuccessful.

But while tracking down online lenders can often feel like chasing a ghost for everyday citizens and their lawyers, regulatory agencies, at least, seem to be catching up.

“We have the tools to trace where the money is going, so we have a pretty good handle of who’s operating,” said Singhvi of the FTC.

“Even if consumers are left in the dark.”

[…]

I am Approved for a Payday Loan – Credit Slips

Received the automated call to my cell phone yesterday morning, whereupon my phone recorded a 45 second message. Not only am I approved for a payday loan in the amount of up to $1,500, I apparently previously applied for a payday loan, and given that “as of April 2014, our lenders have lowered their requirements for loan qualification, I am now approved” (emphasis added). (I did not apply for a payday loan, ever, for the record.) All I need to do is go to this handy website and enter my pre-approval/promo code, which was provided to me twice during the call. The call ended by assuring me that there were no hidden fees to get my loan and congratulating me again.

The unsolicited call was very timely in light of my previous post hypothesizing that payday lenders will venture even more into the Internet arena in the near future. I wonder how this lending network got my cell number (someone sold it to them? data breach?), and how they decided my number belonged to a person from whom it would be productive to solicit business. As they transition to more Internet lending, maybe payday lenders are really widening their targeting? In fact, I received a call a few months ago from a live person asking me if I wanted to consolidate my payday loans. (How many payday loans does the industry think I have?) I replied, “that sounds interesting, tell me more about this consolidation thing.” To which the caller questioned, rather sternly, “do you have any payday loans?” Upon hearing that I have none, the caller promptly hung up. Based on my completely anecdotal experiences, the world of payday lending is getting larger and larger.

Also, I went to the website. The disclosures overall informed me that payday loans are state specific, meaning that I needed to apply to see how much of that $1,500 I could receive right now, in one lump sum, deposited directly into my bank account. But applying seems very, very easy. There even is an option to apply for a loan without the lender running a credit check. I imagine that these phone calls yield some customers, and potentially more credit worthy customers if the marketing truly is as broad as it seems. For cash strapped individuals and couples who are not likely to walk into a payday lending location, an easy-to-use website may be all they need to decide to take out some money to tide them over.

Finally, I received this call to my cell phone at 7:30 am central (Illinois’s time zone). I figured that must violate some federal regulation. And indeed it might! A Federal Communications Commission regulation prohibits telemarketers from using automated dialers to call cell phone numbers without prior consent. Given the pre-recorded message I received, I bet there’s a good chance the call was made with an automated dialer. The FCC and FTC also prohibit telemarketers from calling outside the hours of 8 a.m. and 9 p.m. Given that my cell number is from an eastern time zone, the company likely complied with the regulation, but they sure started calling early. Of course, I could put my cell phone number on the FTC’s Do Not Call Registry, but then I might not get offered any more payday loans.

[…]

Federal Trade Commission busts payday loan 'queenpin' Lisa Jeter …

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Developing Story

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The Federal Trade Commission has sued a handful of payday loan collection agencies for practices that the agency says are in violation of the law. The businesses, based in Atlanta and Cleveland, Ohio, used intimidation and misleading information to trick consumers into paying debts they did not owe, the FTC said in its complaint.

Though legally separate, the companies have operated a common enterprise since 2009 to prey on consumers who had previously inquired about, applied for or received payday loans from online lenders, the FTC alleged.

Gregory Ash, senior staff attorney for the FTC’s bureau of consumer protection, called defendant Lisa Jeter the “queenpin” of the project, which included a network of Post Office boxes and “bogus” company names. Ash and fellow investigators are still working to determine where the alleged lawbreakers got consumers’ contact info, whether it was obtained from a actual payday lender or somehow stolen.

“We are confident they were not contingency collectors,” Ash said. “Based on our interviews with consumers, we don’t believe they were legitimate holders of the debt.”

Pre-recorded messages misled customers, telling them that they were delinquent on their payments, that complaints had been filed against them in court, and they had only a few days to oppose the matter. The supposed debt collectors made harassing phone calls to victims at work, or repeatedly contacted family members, sometimes as often as three times per day. In fact, no lawsuit had been filed, and many victims who paid their “debts” later found out that they never had any debts in the first place, or that their debts had already been paid.

“Since at least September 2009, defendants have collected and processed millions of dollars in payments for debts that consumers do not owe or that defendants have no authority to collect,” the FTC wrote in its complaint.

Ash says the best defense against a predatory debt collector is to get educated.

“Knowing what your rights are as a debtor and a consumer is important,” he said. The best way to stop fraud is to educate consumers so they don’t become a victim of it in the first place.”

The agency makes information on the rights of debtors available at consumer.ftc.gov.

Contact Ellis Smith at esmith@timesfreepress.com or at 757-6315

[…]

Payday Loans: Simple, Easy, and Understandable – Business On Blog

Payday loans are unsecured, short-term cash advances that are not due until your payday. People typically use these payday loans to make ends meet until their paycheck arrives.

While payday loans are very easy to get, they are also very expensive and a bad choice for making ends meet. The U.S. Federal Trade Commission has a nice page that gives good information regarding payday loans. The FTC points out that payday loans are costly and they give a nice example to illustrate the cost. In their example the cost to the borrower is effectively a 391% APR. That is outrageous even compared to a high interest rate credit card.

The FTC also notes that payday loans can be called several different names, but they are all essentially the same thing. Payday loans can also be called cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.

Payday loans are not a good option for borrowing and the FTC suggests several other alternatives. You can figure the APR on the payday loan and then see if a cash advance on a credit card is less expensive. You can also ask for more time to pay your bills. Many creditors are willing to work with you on payments. You can also build up a savings so that you have something to borrow from when the need arises.

For more information on payday loans and the companies that provide them, simply run a search for “payday loans” on Google and you will get plenty of additional information.

[…]

FTC targets cash-reload code scams

It’s the newest quick and convenient way to send cash — convenient for fraudsters, that is, who collect fees for bogus job offers or lottery jackpots, then vanish without leaving a money trail.

The U.S. Federal Trade Commission Tuesday announced new restrictions on “novel payment methods” that phone and Internet scammers favor — including cash reload codes, which are typically used to replenish prepaid cards.

The FTC’s proposed changes to the Telemarketing Sales Rule will make it illegal for telemarketers to ask for payment using the cash reload mechanisms, along with other cash transfer methods.

“People are being asked to go down to the store and purchase a reload,” said Karen Hobbs, an attorney in the FTC Bureau of Consumer Protection. “It is essentially cash — there’s no governance out there.”

The scams start out like a regular cash reload transaction: A buyer goes into a store and pays the cashier for a reload product such as MoneyPak or REloadit. In exchange for cash, the consumer gets a piece of paper or plastic bearing a shielded code number that only the buyer can reveal — often by scratching off a protective coating like those on lottery tickets. Once unveiled, the code number can be activated by the phone or Internet.

The code can be used to recharge a prepaid card, or send money to relatives. But when crooks gets involved, consumers are conned into giving the number to scammers, who can load the cash onto their own prepaid cards and withdraw the money from an ATM, anonymously and untraceably.

“This makes it difficult to identify or track down the perpetrator of the fraud and return funds to customers,” the FTC’s proposed rule states.

Digital cash
Cash reload mechanisms have become popular virtual deposit slips, allowing people without bank accounts to convert cash into digital form. In addition to leaving no link to the parties involved, reload codes are not subject to consumer protections that limit your losses from fraud in conventional bank and credit card transactions.

The rule change would also bar telemarketers from asking you to pay via remote check authorization — where the recipient of funds uses your bank account information to create a check or electronic payment order. Also prohibited in telemarketing sales would be cash-to-cash money transfer services such as those from MoneyGram and Western Union.

Scammers have used the novel payment methods to collect more than $100 million in ill-gotten gains, the FTC’s proposed rule stated.

Growing scam
In one example, the St. Louis Better Business Bureau has seen a rash of employment scams that used cash reloads to defraud victims. One Alton, Ill., man received a call about a supposed $17-an-hour cleaning job, and was told he needed to load $89 on a MoneyPak card to pay for a background check. After he gave the reload code number to the caller, the supposed employer disappeared.

“The scams tell you this is the best way to send money, that it’s insured,” said Bill Smith, investigator for the St. Louis BBB. Such untrue statements are part of the scam.

The untracked payments have been used in a wide range of cons, the BBB said, including supposed loan offers that require an advance payment of insurance. Hobbs at the FTC said that phantom debt collection fraudsters have also used cash reloads to shake down victims, threatening them with jail unless they paid the money immediately.

Other cash-based money transfers via services such as MoneyGram and Western Union can be similarly unprotected, but warnings about paying unknown merchants with those services have driven fraudsters to new techniques, Smith said. Both MoneyGram and Western Union have entered settlements with multiple state attorneys general that required them to set up anti-fraud programs and provide warnings to customers.

Public comments sought
The FTC will take public comments on the proposed rules until July 29. The rule change also broadens a ban against seeking advanced fees for so-called “recovery services,” which promise to help victims recover funds they lost to fraud. The ban, which is currently limited to offers involving funds lost to a telemarketing transaction, would be extended to offers involving any transaction.

Warnings with REloadit already tell customers not to use the cash code to pay merchants. Green Dot, owner of MoneyPak, lists merchants on its website that are authorized to accept payment via cash code and warns against paying others via MoneyPak.

See related: 9 credit card scams to watch out for

FTC targets cash-reload code scams How to pick a bankruptcy attorney Proposed rule could help kids replace stolen Social Security numbers […]

Is the payday loan business on the ropes? | The Great Debate

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Payday lenders have a lot in common with pawn shops, their close cousins: They depend on lending money to desperate people living close to the edge with nowhere else to turn. They first surfaced about 20 years ago in the South and Midwest, often as small mom-and-pop shops. Now the industry is dominated by large national chains, with some 20,000 storefronts nationwide. Coming out of the shadows of cyberspace, however, are Internet lenders, which are like storefront lenders on steroids.

The average payday loan is tiny, about $400, and in the benign view of the industry, it gives customers with trashed credit scores, who lack other credit options, emergency cash until their next paycheck arrives. But according to the Center for Responsible Lending, lenders charge a mind-boggling 391 to 521 percent interest for loans that have to be paid off in two weeks, often triggering a toxic cycle of debt, as borrowers take out fresh loans to cover the old ones. Internet loans are bigger, generally charge a higher annual percentage rate and, consequently, are more expensive than their storefront counterparts.

As non-banks, payday lenders have so far escaped federal regulation, leaving a hodgepodge of state laws as the only bulwark against these usurious loans. If the storefront lenders have been hard to regulate, Internet lenders have been even harder to find, as they make loans to lenders in states where they’re banned by setting up servers offshore or in states where they are legal. Industry experts put the number of online lenders in the hundreds, so far, but one website can reach many more people than a storefront. A January report from San Francisco-based JMP Securities estimated that market share for Internet lenders would hit 60 percent by 2016.

Some attorneys general in states with payday bans, like New York and West Virginia, have sued individual lenders for targeting residents in their states. A 2009 settlement by then-Attorney General Andrew Cuomo with two out-of-state Internet lenders was one of the few cases to force lenders to make restitution to scammed borrowers — 14,000 of them. But the lenders simply resurfaced in some other form.

Richard Cordray, chief of the new Consumer Financial Protection Bureau, has pledged to focus on the industry and held a public hearing on payday lending last January in Birmingham, Alabama. Yet he has been mum on new enforcement plans as the politically besieged bureau sets it sights on more mainstream products such as mortgages, credit cards and student loans.

But could the Federal Trade Commission come to the rescue? Established in 1913, the FTC has recently watched the CFPB steal some of its thunder, but it may be on the verge of not only holding these lenders accountable but also possibly shutting them down.

The FTC began suing cyberspace lenders about five years ago in a flurry of cases, mostly related to fraud or failure to disclose loan terms. Websites came with deceptively labeled buttons that led you to falsely advertised products. One wrong move with your mouse and you just paid $54.95 for a debit card with a zero balance when you thought you were getting a payday loan, witness FTC vs. Swish Marketing. One of the most spectacular examples is the FTC’s recent suit against call centers in India, such as American Credit Crunchers, LLC, that harassed people to repay Internet payday loans they had never even taken out — sometimes even threatening people with arrest. The FTC alleged that the defendants fraudulently collected more than $5.2 million in payments on these phantom loans.

But a new FTC case, against Kansas-based payday lender AMG Services Inc, may set a precedent that topples this house of cards. Earlier lawsuits sanctioned lenders, but didn’t prevent them from returning to the same scams once they settled with the government. What’s different about the AMG Services case is that the FTC goes after the foundation of Internet payday’s business model — the demand that borrowers give lenders access to their checking accounts as a condition of getting a loan. Once the lenders had control of the accounts, they had unfettered access to the borrower’s money and could withdraw money at will — something that borrowers typically don’t understand when they accept the loan. The borrowers were powerless to put a stop to this once they realized what was happening.

“The defendants told consumers that the total amount required to repay the loan will be the amount borrowed plus a one-time finance charge to be automatically withdrawn on a single date,” said Nikhil Singvhi of the FTC’s bureau of consumer protection and lead attorney on the case. “But contrary to those representations, the defendants initiated multiple withdrawals from the consumers’ bank account, assessing a new finance charge each time.”

Stopping the withdrawals was futile. “Consumers would call their bank and say I don’t want these withdrawals processed anymore,” Singvhi says. The bank would request a letter revoking that authority — sent to the bank and the lender — and still the withdrawals kept on coming.

For example, one plaintiff in the suit took out a $300 loan, expecting to pay back the principal, plus a $90 fee, in two weeks. Instead, the lender withdrew a $90 fee for each of the borrower’s next four pay periods, without touching the loan principle. After that, the principal was drawn down in small increments, always with more accompanying fees. By the end, the payments totaled $975. That’s $675 in fees instead of $90 — an extraordinary windfall when factored out across countless loans. Many consumers closed their accounts in desperation.

If the FTC wins its case, the impact on the lenders’ cash flow — and profits — will be significant, if not extreme. If the ability to extract payments by means of electronic funds transfers that extend the life of the loan while fees rapidly mount is what this industry is built on, there could be an industrywide shakeout from which the industry may not recover.

The FTC suit alleges that requiring payment by means of an electronic funds transfer is itself a violation of the 1968 Electronic Funds Transfer Act, which forms the basis of their case. “I think they’re on solid ground,” said Moira Brennan, head of the New York City-based Brennan Law Group, which handles consumer issues. “The Act states that you can’t require an electronic funds transfer as a method of payment.”

Lauren Saunders, managing attorney for the National Consumer Law Center, says the ETF Act would not apply if lenders closed customers’ loans on a single withdrawal, covering both principal and fee. But once they make multiple withdrawals, the Act is violated. And those multiple withdrawals that don’t touch the principal are exactly what make Internet payday loans so profitable. As Saunders says: “Many, if not most, Internet payday loans are structured to pay only the fee at regular intervals for a period of months before the loan is repaid.”

The Online Lenders Alliance, an industry trade group, has no doubt smelled a public relations problem and is coaxing member firms to install a button on their websites for customers to click if they think they’ve been victims of fraud. It is a “public awareness campaign,” says OLA spokesperson Peter Barden, who believes that there is nothing wrong with this industry that the industry itself can’t fix. Customers, he says, “could click through to an OLA Web page that would report it.”

Barden could not say how complaints would be acted upon and couldn’t identify any members who had added the button. But identifying a few bad apples is beside the point. If this source of profit disappears because the FTC prevails in its suit, there could be little — if anything — left to reform.

For years, consumer advocates have witnessed federal inaction and failed attempts at the state level to rein in the industry. Perhaps the FTC will begin to provide results.

PHOTO: The judge’s gavel is seen in court room 422 of the New York Supreme Court at 60 Centre Street February 3, 2012. Picture taken February 3, 2012. REUTERS/Chip East

[…]

FTC Action Halts Allegedly Illegal Tactics of Payday Lending …

After the Federal Trade Commission filed an action in U.S. district court, a payday lender that allegedly attempted to illegally garnish consumers’ wages has agreed to stop the challenged conduct pending trial.

As part of its continuing crackdown on scams that target consumers in financial distress, the FTC complaint alleges that Payday Financial, LLC, doing business as Lakota Cash and Big Sky Cash, along with other defendants, illegally attempted to garnish consumers’ wages without obtaining a court order, to collect payments on payday loans. As a result, the defendants illegally revealed consumers’ supposed debts to their employers and deprived consumers of their right to dispute the debts or make payment arrangements, the FTC alleges.

According to the FTC, defendant Martin A. Webb operates Payday Financial, LLC, and several related businesses in Timber Lake, South Dakota. The defendants offer short-term, high-fee, unsecured payday loans of $300 to $2,525 to consumers throughout the country, advertising on television and through websites such as www.bigskycash.com and www.westernsky.com.

The FTC complaint alleges that when a consumer does not pay back a payday loan on time, the defendants send documents to his or her employer that mimic those used by federal agencies collecting debts owed to the government in an attempt to garnish the consumer’s wages. Under federal law, the government can directly require employers to garnish wages for debts it is owed without a court order. But private creditors must obtain a court order before garnishing a debtor’s wages. The complaint charges the defendants with violating the FTC Act by:

misrepresenting to employers that the defendants are legally authorized to garnish an employee’s wages, without first obtaining a court order; falsely representing to employers that the defendants have notified consumers about the pending garnishment and have given them an opportunity to dispute the debt; and unfairly disclosing the existence and the amounts of consumers’ supposed debts to employers and co-workers without the consumers’ knowledge or consent.

The complaint further alleges that the defendants have violated the FTC’s Credit Practices Rule by requiring consumers taking out payday loans to consent to have wages taken directly out of their paychecks in the event of a default, and have violated the Electronic Funds Transfer Act and Regulation E by requiring authorization for electronic payments from their bank account as a condition of obtaining payday loans.

The Commission vote authorizing the staff to file the complaint was 5-0. The FTC filed the complaint and a request for preliminary relief in the U.S. District Court for the District of South Dakota, Central Division on September 6, 2011. The complaint names as defendants Payday Financial, LLC, Great Sky Finance, LLC, Western Sky Financial, LLC, Red Stone Financial, LLC, Financial Solutions, LLC, Management Systems, LLC, 24-7 Cash Direct, LLC, Red River Ventures, LLC, High Country Ventures, LLC, and Martin Webb. On September 7, 2011, the parties agreed to a stipulated preliminary injunction to immediately halt the alleged unlawful conduct, and the court accepted and entered the stipulated preliminary injunction. The FTC would like to acknowledge the assistance of the South Dakota U.S. Attorney’s Office.

NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law.
The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and
unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call
1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel,
a secure, online database available to more than 2,000 civil and criminal law enforcement
agencies in the U.S. and abroad. The FTC’s website provides free information on a variety
of consumer topics. Like the FTC on Facebook and follow us on Twitter.

(FTC File No. 1123023)
(Payday Financial NR)

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FTC Charges Marketers with Tricking People Who Applied for …

At the request of the Federal Trade Commission, a federal court has halted an online operation that allegedly debited consumers’ bank accounts without their consent when consumers visited the defendants’ websites seeking payday loans. The court also froze the defendants’ assets, pending further court proceedings. As part of its continuing efforts to protect financially strapped consumers during the economic downturn, the FTC seeks to permanently stop the illegal practices and make the defendants refund consumers’ money.

According to the FTC’s complaint, the defendants’ websites, such as mypaydayangel.com and juniperloans.com, asked for consumers’ personal and financial information, such as social security, driver license, and bank account numbers. Near the end of the application form, the defendants offered unrelated “Direct Benefits” and “Voice Net” programs for food, travel and merchandise discounts, or for long distance calling and Internet access. Many consumers who clicked to “submit” a payday loan application were enrolled unwittingly into the programs, which initially charged their bank accounts up to $59.90 per month, and later charged up to $99.90 per year. Consumers often did not notice the program offers, and some people who declined the offers were charged for the programs anyway, the FTC alleged.

As alleged in the complaint, the defendants sent consumers’ bank account information to Landmark Clearing Inc. and other payment processors to electronically generate remotely created payment orders that debited consumers’ bank accounts. Consumers typically discovered the problem when an unexpected debit appeared on their bank statement, or when their bank told them their account was overdrawn. They learned that Direct Benefits or Voice Net received the payments only after they contacted their bank or saw an online copy of the payment order. Consumers who called the defendants for a refund often got the run-around. Many consumers had to dispute the transaction or close their bank accounts to get a refund or stop the defendants from debiting their accounts.

The defendants are charged with violating the FTC Act by obtaining consumers’ bank account information and debiting their accounts without their consent, and failing to adequately disclose that, in addition to using consumers’ financial information for a payday loan application, they would use it to charge consumers for enrollment in unrelated programs and services.

The FTC complaint names Direct Benefits Group LLC, also doing business as Direct Benefits Online and Unified Savings; Voice Net Global LLC, also doing business as Thrifty Dial; Solid Core Solutions Inc.; WKMS Inc.; Kyle Wood; and Mark Berry.

The Commission vote authorizing the staff to file the complaint was 5-0. The complaint was filed in the U.S. District Court for the Middle District of Florida.

NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law. The case will be decided by the court.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call
1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 2,000 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s website provides free information on a variety of consumer topics. Like the FTC on Facebook and follow us on Twitter.

(Direct Benefits Group)
(FTC File No. 1123114)

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