The holidays are a time to appreciate the blessings of the past year and enjoy time with friends and family; they can also be a time of increased financial stress. But this year, predatory lenders pushing high-interest payday and car title loans can no longer target Montana families struggling to make ends meet. Unfortunately, the Missoulian's Dec. 18 article, "Payday lenders find new home online; interest rates hit 1,000 percent" contained several myths perpetuated by payday lenders and did Montana consumers a disservice.
In November of 2010, more than 71 percent of Montana voters supported Initiative 164 and agreed that the 400 percent interest rates charged by the payday lending industry were too high. The rate cap of 36 percent was aimed not just at lowering the interest rate on these loans, but more important, at breaking the cycle of debt. The industry's business model is built on the debt trap, a combination of short-term loans with high interest rates that force borrowers into taking out another loan just to pay off the last one. Before I-164 passed in 2010, half of all payday loans in Montana went to borrowers taking 13 or more loans per year.
The Missoulian article leaves the impression that online lenders operate outside of the law. To be clear, Internet lenders are subject to state law, and if they make illegal loans to Montanans they have no right to collect the loan or garnish wages. Lacking any legal recourse for unpaid loans, lending to Montanans may prove a risky business venture for illegal lenders. If a borrower takes out a loan and switches their bank account information before the charge is drawn on their account, the illegal lender has no legal right to recover the debt.
Although regulating online lenders can be challenging, the Montana attorney general and the Montana banking commissioner do have the authority to go after illegal predatory lenders, and they are actively and aggressively pursuing offenders. In West Virginia, a state that has a historically robust usury law, Attorney General Darrell McGraw has successfully recovered nearly $3 million in refunds to consumers from illegal internet lenders and the collection agencies working for them. EZ Money owner Bernie Harrington must be well aware of the West Virginia attorney general's successful campaign against illegal lenders, but it better suits Harrington's agenda to feed the myth that there is nothing the state can do.
Montana voters, when they approved I-164, made sure the Montana attorney general and the Montana banking commissioner were equipped to deal with lenders that attempt to evade Montana law and engage in subterfuge to disguise illegal loans, including through online lending. I-164 contains language that makes such activities a violation of the Consumer Protection Act, which grants additional powers to the Montana Department of Justice to bring an action against violators of the act.
The Missoulian article does help draw attention to the illegal activity of Internet lenders charging high interest rates to Montana consumers, but unfortunately the article concludes there is little the state can do and Montana consumers will thus continue to be the helpless victims of illegal predatory lenders. The implication of the article is that the protections created by I-164 should be loosened so that in-state predatory lenders can again take the place of the online predatory lenders who are clearly violating the law.
To the contrary, the Montana Attorney General's Office and the Banking Commissioner's Office are cooperatively and actively pursuing payday lenders who are breaking the new law. These offices have been successful in identifying online payday lenders and providing consumer relief when lenders can be located. According to the Montana attorney general, these investigative efforts will likely lead to legal action. Meanwhile, consumers need to be educated about illegal online lending practices and empowered to take steps to protect themselves from these predatory lenders.
In 2010, Montana became the 17th state to cap payday lending rates. Voters in Montana, and across the country, are fed up with predatory lending practices and are reining in the industry. In response, the industry is resorting to increasingly deceptive and illegal practices. But make no mistake about it, whether the loan is issued in a brick-and-mortar storefront or over the Internet, the law approved by Montana voters still applies.
Linda Reed is president and CEO of the Montana Community Foundation; Claudia Clifford is advocacy director for Montana AARP. Both organizations were members of the 400% is Too High - Cap the Rate campaign for I-164.