ATLANTA — Well, that's easy, Renee McKoy thought, seeing the offer.
The metro Atlanta woman knew she could buy shoes and groceries online. So why not also try to shop for a loan? She clicked an email link, squiggled a digital signature and watched $800 pop into her bank account.
What she didn't realize was that she had been lured into a scheme that skirts Georgia's law banning payday lending. McKoy ended up owing three times the amount of her loan, a federal lawsuit says.
Avoiding usury laws
Payday lenders have slipped past state attempts at regulation with various ploys, critics say. These are among the strategies that have fueled controversies:
› Partnering with Indian tribes: In 2017, Georgia reached a settlement with an online lender accused of a scheme to avoid the state’s usury and payday lending laws. Western Sky Financial and affiliates used a shell company affiliated with a Native American tribal entity to avoid the state’s usury and payday lending laws, state officials said.
The scheme involved more than 18,000 loans to Georgia residents with interest rates of up to 340 percent. The settlement came after the Georgia Supreme Court in 2016 ruled that online lenders must comply with Georgia lending laws.
› Undisclosed and inflated fees: In 2018, the Federal Trade Commission mailed refund checks to more than 1 million borrowers deceived by a payday lending scheme. The commission said that AMG Services led borrowers to believe they would be charged a one-time finance fee, but instead made multiple withdrawals from customers’ bank accounts with a new finance fee each time.
In 2016, the agency settled with Red Cedar Services and SFS Inc. following charges that they misrepresented how much loans would cost consumers and other loan terms.
› Registering as a bank, mortgage lender or pawn shop: State usury laws may not apply to banks, credit unions, pawn shops and other lending institutions. A growing concern is that payday-style lenders will set up as online financial technology firms and be able to circumvent usury laws.
Borrowers like McKoy are charged astronomical interest rates in violation of state law, according to the purported class-action filing. The borrowers' attorney said they are victims of an industry that preys on the desperate and vulnerable.
"They are like modern day loan sharks, and they really get people hooked," attorney Michael Caddell said.
Following other complaints about payday lending from around the country, it was looking like the curtains were about to drop on the industry this year. A new rule by the Consumer Financial Protection Bureau was to force payday and vehicle title lenders to take steps to determine if consumers have the ability to repay the loans.
But in early February, the bureau proposed rescinding key requirements, mindful of criticism from the payday industry that the rule would push many lenders out of business and leave under-banked Americans without access to viable credit options.
Among those urging the bureau to turn back the rule is Tennessee lender Kim Gardner. She told the bureau that their clients are among the more than 24 million Americans who don't have access to credit from traditional banks and depend on the loans as lifelines in critical times.
"We continue to give back to the local communities that we serve and if that option is taken away because we have to close our business, I'm not sure what they would do for this short-term credit option," Gardner wrote.
But consumer advocates say the Trump administration capitulated to an industry that keeps borrowers trapped in loans with exorbitant interest rates.
"They took a red pen and crossed everything out," said Ann Baddour, director of the Fair Financial Services Project at a Texas-based nonprofit that advocates for the poor.
Consumer advocates also say that while some states, like Georgia, have enacted laws to try to curtail predatory lending, the industry keeps devising ways around the laws.
McKoy's lawsuit points to one ploy, they say.
Big Picture Loans, the lender sued by the Georgians as well as borrowers in other states, says it does not have to comply with state law because the company is owned and operated by sovereign Indian tribes.
But the lawsuit says tribes in question receive only a tiny cut of the loan profits, while the big money goes to a non-tribal member whose Dallas investment firm, Bellicose Capital, set up the lending entity to sidestep state and federal lending laws.
The Lac Vieux Desert Band of Lake Superior Chippewa Indians, in a statement to The Atlanta Journal-Constitution, said it uses revenue generated by the loans to support health care and other essential services for its members.
La Vieux Desert Chairman James Williams Jr. said that the tribe's lending arm, Big Picture, also is a "vital service" for borrowers who don't have access to traditional means of credit and that it helps them understand loan costs by providing substantial documents.
Richard Scheff, an attorney for Bellicose Capital founder Matt Martorello, told the AJC the suit was an attack on Native American tribes and that Martorello was "proud to have participated in helping a Tribe create a self-sustainable way out of poverty."
But Caddell, the attorney for the Georgia borrowers, said Big Pictures Loans is a front to disguise Bellicose's role.
"These Indian tribes are just the latest in a long line of subterfuges that these payday lenders have entered into to try to and evade the law," Caddell said.
Others point out that title loan companies aren't bound by Georgia's cap on interest rates and see that as another loophole that can hurt consumers.
Borrowers who pawn their cars can get socked with interest rates of up to 300 percent, said Liz Coyle, executive director of Georgia Watch, a consumer advocacy group that is pushing the Legislature to close the loophole that allows car title companies to charge high rates.
Rhonda Patterson, a Savannah borrower, learned that lesson the hard way when she pawned her car for a $1,200 loan to cover medical expenses. The loan ended up costing her as much as $3,000.
"That's crazy — I'll never do it again," Patterson said.
Demand for loans
It's not always a story of doom and gloom with payday lenders, some borrowers say.
How you can weigh in
The Consumer Financial Protection Bureau has proposed scrapping or delaying rules designed to prevent payday lenders from trapping borrowers in a cycle of debt. One rule that was set to go into effect this year would require payday lenders to assess the ability of borrowers to repay loans. If you want to weigh in, you have until March 18 to provide comments. Visit consumerfinance.gov for more information. You can also mail comments to Comment Intake, Bureau of Consumer Financial Protection, 1700 G St. NW, Washington, DC 20552. Be sure to include Docket No. CFPB 2019-0007 in your correspondence.
In dozens of testimonials to the bureau, purported borrowers said a payday loan paved the way for financial security, not ruin.
An income tax preparer who also runs a year-round party dress shop in Naples, Florida, said the loans allow the business to stay afloat between tax seasons. In a small town in Kentucky, a woman said the loans helped her open a beauty salon. A disabled veteran said the loans allowed him to get an education, endure a custody battle and start a small company.
"Short-term loans are necessary for myself and other small business owners who don't have great credit or several assets," he wrote.
Some said they would rather pay interest on such loans than pay overdraft fees for each transaction at the bank.
"There have been a couple too many occasions in the past where I had to pay $105 in overdraft fees from my bank, on my morning coffee, gas for my car, and my burger and fries at lunch, just because something unexpected cleared my account the same day," said a father of four who had borrowed for a decade.
The names of most of the borrowers had been redacted so the AJC could not confirm their comments.
Even critics of the loans say the bureau needs to ensure such a source of credit stays available to consumers.
Brad Botes, an attorney in Alabama, said it's clear some people make good use of the loans. In 30 years of practicing bankruptcy law in different locations across the country, he's watched people with scarred credit make ends meet because of access to the cash advances.
"We agree there is a demand and there's a need," Botes said.
However, he said he's also seen too many cases of people hurled into financial ruin, and regulators need to step in and protect consumers from an assortment of deceptive practices.
Among them, he said, in some cases borrowers agree to automatic drafts from their bank accounts, triggering unexpected overdraft fees that spiral out of control.
Botes doesn't buy the claim that the industry is on the ropes because of over-regulation.
"If you look into any lower-income area, at least in the community I live in, you see an abundance of these payday lenders on every street, and they ain't hurting too bad."
The public has until March 18 to comment on whether the bureau should roll back the requirement that lenders assess if borrowers will be able to afford a loan and still meet their basic living needs and financial obligations.
If the rollback is adopted, states likely will become the front line in trying to shield consumers.
In recent years, several states that previously authorized payday lending or vehicle title loans took steps to restrict the loans. Georgia is among 18 states with laws that either ban payday lending or impose strict limits on interest rates on the loans, though Georgia allows car title loans.
Kentucky is among states where a database keeps track of borrowers' activity so that lenders cannot lend to borrowers who already have multiple loans. There is a "cooling-off" period in other states so that borrowers don't get hooked into another high-interest loan too soon. Some states prohibit loan rollovers.
The Community Financial Services Association of America, which represents thousands of payday lenders, announced in July on its website that it expects its members to provide an extended payment plan for customers who are undergoing financial difficulties and can't repay a loan when it is due.
It also called on members to undertake a reasonable, good-faith effort to determine a customer's credit worthiness and ability to repay the loan.