Costly Loans Are Drawing Attention From States

Loralty Harden, a 62-year-old retiree, was distressed when the balance on a short-term loan she had obtained to supplement her Social Security income did not budge even though she diligently followed the payment plan that came with it.

Only after she went back to the branch of All Credit Lenders in Machesney Park, Ill., where she originally received the loan in 2011, did she learn why. Her minimum payments were being devoured by a monthly “account protection fee” â€" a mandatory $15 payment on every $50 she borrowed â€" that Ms. Harden says she never knew about. That pushed the interest rate, advertised at 18 percent, above 350 percent, according to loan documents reviewed by The New York Times.

Ms. Harden is at the front lines of a battle playing out state by state, where the authorities are redoubling efforts to shield vulnerable Americans from short-term loans with interest rates that can exceed 300 percent.

The crackdown gained momentum on Tuesday when the Illinois attorney general, Lisa Madigan, accused All Credit Lenders of misleading borrowers into taking out expensive loans that come with insurance products that they do not need or cannot use.

In a lawsuit against All Credit Lenders, Ms. Madigan contends the company, which has storefronts in Illinois, South Carolina and Wisconsin, deceived borrowers into buying a product pitched as a way to protect them from falling behind on payments in the event of a job loss. But those protections never materialize, the lawsuit said. In fact, the fee is actually a way to raise interest rates that circumvent the state’s usury cap of 36 percent.

What is particularly troubling, the lawsuit said, is that borrowers â€" including those making their monthly minimum payments according to the company’s instructions â€" are effectively incinerating money. Minimum payments cover only the interest and the mandatory maintenance fee charged each month.

“This is one of the more egregious products I have come across,” Ms. Madigan said in an interview this month.

All Credit Lenders declined to comment.

Ms. Madigan’s lawsuit â€" which seeks to halt All Credit Lenders from offering such loans and demands relief for residents who used the products â€" is the latest salvo in a broader effort to clamp down on payday lenders and their practice of offering fast money to borrowers so desperate for cash that they are often willing to accept it at almost any terms. As part of that push, for example, Illinois and 14 other states have instituted caps on interest rates in recent years.

More broadly, the litigation with All Credit Lenders offers a fresh view inside an evolving tango between the authorities and lenders, which regulators say have developed products practically overnight to replace the ones that have been banned.

“We have seen in a number of states considerable creativity on behalf of lenders in exploiting definitional weaknesses in existing payday consumer protections,” said Tom Feltner, director of financial services at the Consumer Federation of America.

Put simply, some lenders devise innovative ways to skirt laws. Some have tweaked their products to take advantage of loopholes in state laws by tacking on fees â€" like the mandatory account protection fee â€" that are not factored into interest rates advertised to borrowers.

Others have shifted their loan terms, typically by allowing borrowers more time to repay the loans, to fall just outside state definitions of payday loans. Some lenders have done away with fixed payment periods entirely, issuing open-ended loans that do not come with a repayment schedule.

Still others have migrated from storefronts and set up online operations in more hospitable states or far-flung locales like Belize or the West Indies, where the lenders can more easily evade state caps on interest rates.

The payday loan industry has long argued that it provides a valuable product to borrowers who might otherwise lack access to credit. High interest rates, the industry points out, are simply a reflection of the riskiness of lending to borrowers with tarnished credit histories and the short-term nature of the loans. And some worry that the regulatory push will go too far, inadvertently hurting businesses that are operating aboveboard.

“If the focus is fraud, we’re in favor of it,” said Peter Barden, a spokesman for the Online Lenders Alliance, an industry trade group. “What we’re seeing is that there seems to be an intention to throw the baby out with the bath water.”

Still, the federal and state authorities are not convinced.

The Consumer Financial Protection Bureau is investigating a range of lenders that offer short-term loans to borrowers across the country. Among them is the World Acceptance Corporation. In a filing with the Securities and Exchange Commission last week, World Acceptance disclosed that it was under investigation by the bureau for potential violations of conumer protection and fair-lending laws. World Acceptance’s filing stated that it “believes its marketing and lending practices are lawful.”

Regulators in at least 21 states have taken aim at lenders tied to Native American tribes. Relying on those ties, the lenders contend they are part of the “sovereign nation” â€" a status that insulates them from federal and state laws.

New York State’s financial regulator, Benjamin M. Lawsky, for example, sent letters to 35 online lenders, including some affiliated with tribes, ordering them to “cease and desist” from offering loans that violate the state’s usury law, which caps interest rates at 25 percent.

To keep pace with the lenders, government authorities are devising novel tactics. In one emerging strategy, some state and federal regulators are going after so-called lead generator websites, which provide lenders with reams of sensitive financial information. That data can be crucial, the authorities say, for online lenders to gain lucrative access to borrowers, even in states where the loans are banned.

The Consumer Financial Protection Bureau and New York State are investigating the firms for their role in connecting borrowers to lenders, according to the agency.

While payday loans can be easy to get â€" some lenders promise virtually instant approval â€" they can be tough to get out of, especially because interest and fees accumulate. The loans from All Credit Lenders were particularly tricky for borrowers like Ms. Harden of Illinois to pay off.

“It was like ‘Groundhog Day,’ ” Ms. Harden said.