How Payday Loans Leave Cash-Strapped Borrowers Unbankable

By Zeke Faux

Barry Barker’s flock of macaws and kites were squawking for food last year when he went online for a payday loan to save them. The automatic debits got so costly he had to close his bank account to stop them.
Barker, 71, a field biologist in Florida who runs a nonprofit shelter for exotic animals, isn’t alone. Thousands of Americans exit the banking system after turning to last-resort lenders, according to a study released yesterday by the Pew Charitable Trusts. Of 252 online payday-loan borrowers surveyed by Pew as part of a three-year research project, 22 percent closed a checking account or had one closed for them.
Payday lending is migrating to the
Internet as states from New York to California restrict the costly short-term loans, which are secured by a borrower’s next paycheck. The websites charge twice as much on average as payday stores and account for a disproportionate share of consumer complaints about fraudulent charges or harassment by debt collectors, according to Pew.
“Abusive practices in the online payday-loan market not only exist but are widespread,” Nick Bourke, director of the Pew project, said in a statement.
Pew is releasing the study as the U.S. Consumer Financial Protection Bureau weighs the first federal payday-loan guidelines. Regulators should require lenders to make more affordable loans and disclose the cost clearly, Pew said.

Consumer Demand

Payday lenders say they provide a valuable service to people who lack access to cheaper forms of credit. The Online Lenders Alliance, a lobbying group, said in a statement responding to the Pew study that “its members are working to ensure consumers are treated fairly.”
Some of the borrowers surveyed by Pew who closed their bank accounts said lenders were making unauthorized withdrawals, while others said they couldn’t keep up with the payments.
The average interest on a $100 loan is about $25 every two weeks, or an annual rate of 652 percent, according to Pew. About a third of borrowers said their loans were set up to only withdraw those fees, meaning they ended up making several payments without reducing the principal.
“Their business model is based on churning -- getting people a loan and then having people re-up it so they stay in debt indefinitely,” said Liz Murray, policy director for National People’s Action, a network of community organizations that ran protests against payday lenders in August that it called “Shark Week.”

Offshore Address

Pew found that online lenders accounted for 89 percent of payday-loan complaints made to the Better Business Bureau in 2011, even though they control only a third of the industry. Some online firms are set up offshore or affiliated with American Indian tribes, and say state laws don’t apply to them. Most complaints were about those kinds of lenders, and not state-licensed companies like Speedy Cash Inc. and Cash America International Inc. (CSH), according to the report.
Barker got his loan through a website called CashJar.com, which he found by looking on Google for a payday loan. The website, which has said it’s based in Belize, has been cited by regulators in at least seven states for making illegal loans.
CashJar was part of a network of payday websites run by three Americans on the Caribbean island of St. Croix, Bloomberg News reported last month, citing people with knowledge of the matter who asked not to be identified. The company, called Cane Bay Partners VI LLLP, is part-owned by Vector Capital IV LP, a private-equity fund that counts Harvard University and the Massachusetts Institute of Technology among its investors, according to former employees of Cane Bay and Vector. The Pew report doesn’t mention Cane Bay or CashJar.

Closing Account

Ronn Torossian, a spokesman for Cane Bay, said the company does consulting, not payday lending. He declined to say whether Cane Bay runs CashJar, saying confidentiality agreements prevent him from discussing any clients. CashJar couldn’t be reached for comment because its website is down and its phone number now belongs to another company.
Barker, who ended up filing for bankruptcy, said he had to close his bank account to stop CashJar from making automatic debits. He has since found homes for all but seven of the abandoned birds he was caring for.
“When I closed the checking account, that’s when the phone calls started,” Barker said. “The threats were unreal. They said they were going to send the sheriff to my house within 24 hours.”