The Washington PostDemocracy Dies in Darkness

Many states have cracked down on payday loans. Here’s how lenders still get away with it.

Maranda Brooks stood outside a Cleveland payday loans business last month that she has frequented in the past. Troubled by consumer complaints and loopholes in state laws, federal regulators are putting together expansive, first-ever rules on payday loans aimed at helping cash-strapped borrowers from falling into a cycle of high-rate debt. (AP Photo/Tony Dejak)

Payday lenders are a slippery bunch. In recent years, several states have passed laws curtailing these kinds of loans, which often charge triple-digit interest rates and tend to be a last resort for the poor. Some states have banned them outright, while others have tightened their rules to protect borrowers from what legislators say are abusive terms.

But the business of lending to the low-income is too lucrative for companies to give up without a fight. Even as state lawmakers have tried to rein in payday lending (and its cousin, the pink slip loan), lenders find loopholes at every turn. They play with definitions, get creative with licensing, or even partner with Indian tribes.

In one of his trademark policy rants, comedian John Oliver called the situation “legislative whack-a-mole.”

The Consumer Finance Protection Bureau has signaled that it will propose a national set of rules to better regulate the industry. Citing anonymous sources, the New York Times reported Monday that the CFPB is looking at tighter lending standards and restrictions on how many times a loan can be rolled over.

According to the Times story, there may be a difficult fight over what types of loans are regulated. If the rules are too narrow, lenders might slip through the cracks — a problem that the CFPB is well-acquainted with. “They recognize how savvy the lenders are at re-creating themselves,” said Rebecca Borne of the Center for Responsible Lending, a nonprofit that advocates against predatory lending.

As it mulls its strategy, the CFPB has no shortage of examples of regulation gone awry. Here are just five ways that lenders have dodged efforts to tamp down on payday loans.

1. They disguise themselves as other kinds of lenders

In 2008, Ohio lawmakers passed a hard-fought law to stop abusive short-term loans. There would be an interest cap of 28 percent for short-term loans and a minimum term of 30 days. To skirt this law, many payday lenders simply got licensed as mortgage lenders, which operate under different rules.

“If there’s any wiggle room, if there’s a license that allows you to continue doing what you were doing, then lenders will gravitate to that,” explained Tom Feltner of the Consumer Federation of America, a watchdog group.

In Ohio, lenders began making loans that they called mortgages but which looked and behaved like payday loans. The loans were a for few hundred dollars, had to be repaid within a couple of weeks and carried triple-digit interest rates. In June last year, the Ohio Supreme Court ruled that this practice is legal, overturning an appeals court verdict.

2. They dance around the definition of payday lending

In 2006, Congress passed the Military Lending Act, which in part forbids lenders from charging active military households more than 36 percent interest on short-term loans. That provision has been something of a failure, according to a report last month from the CFPB.

The problem is the definition of a short-term loan. For instance, the law regulates payday loans of 91 days or shorter; to sidestep that, lenders can offer loans just slightly longer than 91 days. The report describes several instances of extended payday-like loans with exorbitant interest rates.

Furthermore, most payday lending laws only apply to loans with a fixed term. Virginia strictly regulates payday loans, so lenders have begun to offer lines of credit, which fall outside of the law because they have no fixed repayment date. Customers pay a minimum fee each month, but otherwise the debt keeps on rolling over, often subject to interest rates in excess of 300 percent because it’s not subject to the payday lending law. In January, Virginia lawmakers again rejected a bill that would have closed such a loophole.

3. They issue simultaneous loans

In Mississippi, two-week loans cannot exceed $250. To get around this 2012 law, payday lenders are splitting up big loans into smaller, concurrent loans. Someone, for instance, might get four $100 loans at the same time. It’s illegal to make a $400 loan that’s due in only two weeks, but somehow this equivalent practice is okay.

Mississippi lawmakers have been trying to close this loophole for a while, but the bill keeps dying. “It’s not something the majority wants to take place,” state Rep. Adrienne Wooten (D) told the Mississippi Business Journal last week.

4. They call themselves loan middlemen

In order to evade Texas’s laws on payday loans, many in the industry registered as credit repair organizations. They don’t do any lending themselves, but they do much credit repair, either. Instead, these groups operate as middlemen, connecting customers to law-abiding loans from third-party lenders. They make their money by slapping their own fees on top of each transaction.

So far, the practice has skated by on a legal technicality. Courts have said that credit repair fees don’t count as usurious interest, though in practice poor people are still paying a lot to borrow a little.

The irony is rich here. Credit repair organizations were originally envisioned as benevolent groups helping people get out of debt. As Feltner explains, “The law was intended to authorize organizations to help borrowers who were in trouble with credit.” Inadvertently, this same law has provided shelter for organizations in Texas seeking to make what are effectively high-interest loans. 

5. They use Indian tribes to skirt the law

Some payday lenders partner with Indian tribes to exempt themselves from local lending laws. It’s the same principle of sovereignty that allows many tribes to run casinos on their lands. The Indian tribe lenders tend to operate online, which allows them to offer their services nationwide — including in states where payday lending is outright banned.

Last year, Al Jazeera America profiled a “matchmaker” who brings together payday lenders and tribes looking to profit by lending their names to these operations. The outfits have gotten into several lawsuits.

“What they’re doing now is, frankly in my view, committing criminal usury,” one regulator in Connecticut told Bloomberg. Connecticut recently fined some Indian tribe lenders for making illegal loans to state residents. New York regulators have made a similar argument: Though these lenders are operating on Indian lands, the transactions involve state residents and should be subject to state laws.