SpotLoan, Plain Green Loans, and other companies that offer Internet “payday” loans that are intended to provide funds until a paycheck or payment of government benefits arrives operate in a simple manner. These businesses obtain a borrower’s bank account information for the purpose of depositing the loan proceeds and withdrawing both the loan payment and any interest charges or other fees associated with the loan. An initial problem regarding this activity is that, like some of their brick-and-mortar counterparts, these web-based companies typically charge illegally high interest and do not properly disclose the required fees.
Some borrowers have also reported that those companies automatically renew loans; the harm from that includes driving the borrowers increasingly deep into debt.
A broader problem relates to Internet payday loan companies lending money to customers in one of the 15 states, such as California and New York, in which that activity is either illegal or requires a license to conduct that form of business. Many of these companies circumvent those laws by operating from states where their business is legal but still making loans to residents of states that either prohibit or specifically regulate that form of borrowing.
Government regulators in the states in which Internet payday loan companies illegally operate are starting to direct their activity to the banks that facilitate the loans by granting the companies access to the borrowers’ accounts. Federal involvement includes both the Department of Justice and the Federal Deposit Insurance Corp. acting to get the banks that facilitate the illegal loans to stop transacting business with the web-based businesses that issue them.
The law related to the underlying lending activity reflects legal concepts that include (1) usury laws that restrict the interest that a creditor can charge a borrower on a loan, and (2) general state and federal laws that impose standards on lenders and overall regulate the banking industry.
The law related to the enforcement efforts that are directed at the banks extends beyond the general guidelines that apply regarding executing financial transactions. Other possible legal liability relates to the role of the bank in facilitating the Internet payday loan companies operating in a state in which they lack the legal authority to do so.
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