Payday lender Western Sky Financial to stop funding loans on Sept. 3.

Western Sky Financial, a prominent online lender that offers short-term loans at triple-digit interest rates, said it will stop funding loans on Sept. 3 amid mounting legal battles with authorities in several states, including Maryland.

The decision arrives as state and federal regulators are clamping down on payday lending, a burgeoning industry that operates under a patchwork of laws. These loans carry high interest rates and balloon payments that can trap Americans in a cycle of debt, critics say. Industry groups say payday lenders are being persecuted and argue that they serve a need that is not being met by traditional banks.

Officials at Western Sky did not respond to requests for comment, but the firm explicitly said on its Web site that it will no longer provide loans as of September.

Western Sky has been the subject of several lawsuits challenging its lending in states with strict usury laws that cap interest rates on loans. The company is owned by a Cheyenne River Sioux tribal member and operates on the tribe’s South Dakota reservation. It claims that the tribe’s sovereign immunity makes the company exempt from following state law.

This month, New York state’s attorney general, Eric Schneiderman, sued the company, alleging that it violated state licensing and usury laws that cap interest rates on loans at 25 percent.

Schneiderman accused the company of charging New Yorkers annual interest rates upward of 355 percent. The lawsuit aims to stop Western Sky from engaging in lending in the state and to void the loans it has already made. The attorney general’s office said the case will go forward despite the company’s decision to stop lending.

Similar actions have been taken against the firm in Oregon, Colorado, Minnesota and Maryland. In 2011, the Maryland Department of Labor, Licensing and Regulation issued a cease-and-desist order against Western Sky after receiving a barrage of consumer complaints.

“There has been significant expansion of online lenders, and the driver is technology,” said Mark Kaufman, Maryland’s commissioner of financial regulation. “There is no doubt that the economics of the business change when you can sit behind a computer and make thousands of loans, versus sitting behind a desk and make a few in a day.”

Advocacy groups have long been concerned about the ability of payday lenders to circumvent state laws. Once states began introducing interest rate caps, some lenders migrated online or moved their operations offshore to sidestep laws. Other lenders began forging relationships with Native American groups to take advantage of their sovereign-nation status.

State authorities have stepped up efforts to go after the lenders, especially those operating under Native American sovereignty, with more enforcement actions and lawsuits.

Benjamin M. Lawsky, head of the agency that regulates banks in New York state, this month ordered 35 online and Native American lenders to stop providing online payday loans in the state. In response, two Native American groups filed lawsuits against the state last week, saying its actions violated their federal status.

As states redouble their efforts to police payday lenders, consumer and industry groups are waiting to see what steps the Consumer Financial Protection Bureau will take to enhance federal oversight.

The bureau has supervisory and enforcement authority over storefront, online and bank payday lenders. In April, it took a step closer to imposing rules to govern the industry with a research report on the payday-lending landscape. In one key finding, the report said the average borrower took out 10 payday loans in a year and paid $458 in fees.

Peter Barden, a spokesman for the Online Lenders Alliance trade group, said the backlash against payday lenders could deprive millions of Americans of access to small-dollar loans.

“If regulators pressure banks to stop processing these legal payments, it would cut off an important credit choice for millions of underserved consumers,” he said. “It could also send a chilling message to banks who are legally processing these and other transactions.”

Uriah King, vice president of state policy at the Center for Responsible Lending, contends that community banks and credit unions offer small-dollar loans at better rates than payday lenders. Payday loans, he added, are often used to cover recurring expenses, which can trap consumers in unsustainable loans.

“A two-week balloon loan priced at 400 percent is just inherently unsuitable for people who are in the red every month with their basic expenses,” King said.

Danielle Douglas covers the banking industry for The Washington Post.
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