With the right rules in place, predatory lending can be reined in and abuses can be curbed even in the Internet era, according to a policy brief from the Center for Responsible Lending.

The study, which looks at the effect of enforcement of state and federal laws, belies the industry’s claim that there are no rules that can stop predatory lenders in the digital age. Contrary to the message from predatory lenders, Attorneys General and other law enforcement leaders should not simply give up. Rather, where proper rules exist, their efforts are preventing the debt trap.

Specifically the study found:

  • Attempts to sidestep regulations through a number of schemes have failed. Unscrupulous lenders have unsuccessfully claimed that affiliation with third parties or operating online exempts them from complying with state regulation.
  • Attempts to hide behind an elaborate web of services – including lead generators, payment processors, and debt collection agencies – to issue and collect illegal loans have also failed.
  • In states across the country, laws without loopholes have been effectively enforced despite industry claims to the contrary. Law enforcement actions have resulted in millions of dollars in restitution and fines.

“Those states and law enforcement officials who are committed to protecting against the debt trap have found a way to do it,” said Diane Standaert, director of state policy for the Center for Responsible Lending. “Tools are available to halt these illegal lending operations, protect consumers and assess penalties for violation of state law.”

“The key is that the laws and regulations must not allow for any loopholes whatsoever,” said Brandon Coleman, the study’s co-author and a policy counsel for the Center. “Predatory lenders will exploit any loophole available to them, which is why a rate cap in the states, which is simple and airtight, is the very best answer,” Coleman said. “An iron-clad rule is also the key to the Consumer Financial Protection Bureau’s success or failure in its effort to rein in the worst abuses of payday lending nationally.”

Payday loans – whether made online, in stores or by banks – are designed to trap individuals in long-term debt. Data consistently shows that the majority of payday loan revenue comes from repeatedly churning borrowers. These loans are associated with increased likelihood of overdraft fees, bounced checks, and even bankruptcy and bank account closures.

While these positive outcomes are encouraging, regulators’ ability to engage in meaningful enforcement actions are made possible only by strong underlying laws at the state and federal levels. Thus, strong regulation is essential at all levels of government to effectively prevent debt trap lending practices.

For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Diane Standaert at dianes@responsiblelending.org or 919-313-8550.