DC sues online lender over ‘predatory’ loan scheme

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The District of Columbia attorney general is suing online lender Elevate to protect residents from “predatory and expensive loans.”

The lawsuit, filed Friday June 5 by Attorney General Karl Racine, is the latest salute in an ongoing battle between consumer advocates and lenders over short-term unsecured loans which opponents say may be too costly and risky.

Elevate dismissed the lawsuit, saying in a statement to CNBC Make It that the company planned to defend itself against “this frivolous lawsuit which lacks merit and ignores well-established federal loan laws. Elevate will continue to be the reality of the business. access to credit for millions of people. Americans. ”

The dispute arises at a time when Americans are increasingly looking for credit. One in three Americans has lost income due to the coronavirus pandemic, according to the Financial Health Network 2020 US Financial Health Pulse, a survey of more than 2,000 American adults between April 20 and May 7, 2020. Among the Americans who report losing income, 3% of survey respondents said they had to borrow money through a payday loan, deposit advance or pawnshop.

In fact, to help consumers and small businesses affected by the coronavirus pandemic, federal regulators – the Federal Reserve System, the Office of Consumer Financial Protection, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency – in fact encouraged banks and credit unions to “offer responsible small dollar lending to consumers and small businesses in response to Covid-19”. Regulators say banks and financial institutions could structure these new loans in a variety of ways, including open-ended lines of credit, installment loans repaid over a fixed term, or single payment loans.

While increasing the number of institutions providing smaller loans may help some Americans access much-needed funds, it could also lead to more predatory loans. “The FDIC has let the banks it oversees launder loans for predatory lenders, so it’s up to states and DC to empower and protect their families from these outrageous and illegal loans,” said Lauren Saunders, associate director of the National Consumer Law. Center.

“The last thing we need during the Covid-19 crisis are more predatory loans,” Saunders adds.

Why Experts Say Small Unsecured Loans Can Be Risky

Although small unsecured loans can be easy to obtain, they can be very difficult to repay. A payday loan, for example, is a type of small loan that you can usually take out by going to a lender who offers them with just a valid ID, proof of income, and a bank account. Unlike a mortgage or car loan, no physical collateral is usually required. But they are not available in all states. Currently, Arizona, Arkansas, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, New Mexico, Pennsylvania, Vermont, West Virginia and DC completely ban these types of loans. Additionally, 37 states have specific laws that allow payday loans, but with restrictions, such as interest rate caps and maximum loan amounts.

Most lenders who offer payday loans and installment loans require borrowers to pay a “finance charge” (service charge and interest) to secure the loan, the balance of which is due two weeks later, usually when your next troubleshooting. Installment loans are very similar to payday loans, but they can have longer repayment periods, typically four to 60 months, according to Pew Charitable Trusts. About 10 million Americans use installment loans each year.

Both types of loans can be extremely expensive, with many lenders regularly charging interest rates between 100% and 400%. This is compared to personal loan rates which vary from 10% to 28% on average, depending on your credit. Or credit cards, which on average charged about 15% interest in February, according to the Federal Reserve in St. Louis.

Lenders argue that high rates are necessary because payday loans are risky to finance. But borrowers often cannot repay these high cost loans right away, so they are dragged into a cycle of borrowing and accumulating finance charges.

Research by the Consumer Financial Protection Bureau has found that almost one in four payday loans are re-borrowed nine or more times. Additionally, borrowers take about five months to repay loans and cost them an average of $ 520 in finance charges, reports The Pew Charitable Trusts. This is in addition to the original loan amount.

In an age when many Americans may not be sure when their next paycheck is coming, going with a lender that offers a short-term loan that charges a triple-digit APR is a bad idea, says Rebecca Borné, advisor main policy of the Center for Responsible. Ready. “Avoid these lenders, these are problems,” she said.

Recent lawsuit seeks to eliminate ‘unscrupulous’ loans

Over the past few years, Elevate has entered into more than 2,500 loan agreements with DC residents for two types of extremely high-rate loan products, according to Friday’s lawsuit. Rise, which is an installment loan, charges an interest rate of 99% to 149%, according to Racine’s office. Elevate also offers a line of credit called Elastic, which effectively charges APRs between 129% and 251%, Racine found.

Yet DC does not allow payday loans and is one of 45 states and jurisdictions in the United States that cap interest rates on installment loans and lines of credit, restricting the maximum APR that lenders have. approved can charge at 6% or 24%, depending on the type of loan. Elevate’s highest interest rates are 42 times the legal limit, according to the lawsuit. To circumvent the rate restrictions, the lawsuit claims that Elevate has partnered with two state chartered banks, which are not subject to state interest rate limits. But Elevate ultimately controlled the loans, took the risks and got the rewards, the lawsuit claims.

District law sets the maximum interest rates that lenders can charge to protect residents from the prey of unscrupulous lenders and exploiters. We are suing to protect DC residents from the risks of these illegal loans and to ensure that “Elevate is definitely ceasing its business activities in the District,” Racine said in a statement.

National Center for Consumer Law

Advocates say lenders are increasingly using these “bank rental programs” as a loophole, creating high-cost loans through an FDIC-regulated bank before buying them out in order to continue charging exorbitant interest rates. . In fact, the National Consumer Law Center has compiled a watch list of companies engaging in these tactics.

“Interest rate caps are the most effective tool available to states to protect their residents from predatory lenders and businesses should be held accountable for knowingly and deceptively escaping these caps,” said Rachel Weintraub, legislative director and general counsel for the Consumer Federation of America.

Elevate defended its business strategy of partnering with banks. “At a time when federal regulators are asking banks to step up and provide more options for unprivileged Americans, Elevate is making it easier to access transparent and responsible credit,” the company said. “By licensing our fintech, FDIC-regulated banks are able to serve customers they might not otherwise be able to, including 160 million Americans who are unprivileged and on invisible credit.”

Racine’s office issued a cease and desist letter in April 2020, but said it filed a lawsuit to permanently prevent Elevate from “engaging in deceptive marketing practices, forcing Elevate to cancel loans made to residents of the district. , reimburse the interest paid by consumers as restitution and pay civil penalties. ” Elevate does not currently offer loans in Washington DC

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