WASHINGTON - Short-term payday lenders
are increasingly using the Internet to circumvent state laws, charging annual
interest rates as high as 780 percent and automatically debiting late fees and
other charges to customers' bank accounts, according to a new study.
The study released Tuesday by the
Consumer Federation of America shows a spike in abuses among payday lenders that
have moved their operations online.
Many don't bother to get licensed in
the states in which they operate and fail to comply with state consumer
protection laws, according to the federation report, titled "Internet Payday
Lending."
Payday loans are small, quick cash
loans with high interest rates, designed as an advance against a borrower's next
paycheck, when the loan become due in full. The fees, typically $15 to $30
per $100 loaned for two weeks, make the industry extremely lucrative.
The federation estimated there are
about 22,000 storefront payday loan outlets in the United States, generating $40
billion a year in loans and $6 billion in finance charges.
"Payday lenders entice cash-strapped
consumers to write checks without funds on deposit, and then use those checks to
coerce repeat transactions or collections," according to the study.
The report found few reliable
statistics on Internet-based payday lenders, saying that most state and federal
regulators don't track the industry.
One payday marketer cited by the
federation estimated that more than 70 million consumers took out payday loans
over the Internet in 2003.
The District of Columbia and 33 states
have enacted laws or regulations that authorize check-based payday lending,
generally with restrictions, but not electronic payday lending.
Internet-based payday lenders evade
state consumer protections by getting licensed in states with lax laws,
operating without a license or by relocating outside the United States, the
study found.
The federation said enforcing state
licensing rules is difficult because online payday lenders often change their
Web addresses and provide little information on the parent company online.
The report found that few payday
lenders adequately disclose their finance charges online. And many of the
contracts include difficult-to-find clauses that automatically refinance the
loan and debit the financing fees directly from a consumer's bank account.
And once a consumer consents to automatic debits, the lender can initiate
payments without any action by the borrower, the study found.