By Dolores Kong
The Boston Globe

For those who can't make it from paycheck to paycheck,
there's a new form of what some regulators and
consumer advocates call "predatory lending" or "legal
loan sharking" - Internet payday loan sites.

Millions of people are already taking out
high-interest payday advances in states that don't cap
interest rates, but these Internet sites raise the
ante, say critics.

Now the technology can make these short-term payday
loans available to any applicant, even if he lives in
a state such as Massachusetts, which caps interest

A payday loan, also known as a deferred deposit, is
typically an advance of a few hundred dollars on a
person's paycheck for up to two weeks, with fees of
$15 to $20 for each $100 advanced. While the fees
don't seem like much on a dollar basis, they amount to
more than 400 percent when calculated as an annual
percentage rate. Some people get into a never-ending
cycle of going from one payday loan to another,
without being able to pay back the principal.

To warn Massachusetts residents about this new trend,
the state Office of Consumer Affairs and Business
Regulation and the Division of Banks recently released
a report titled "Internet Payday Loans - Risky
Business." Their survey of payday loan Web sites found
some of them engaging in such questionable practices
as failing to disclose fees and the true cost of a
loan figured as an APR, or asking for private
information such as an ATM PIN.

"We are very concerned about payday lending. First and
foremost, because the interest rates you're looking at
are so high, consumers are going to be ripped off by
these places," said Steven Antonakes, senior deputy
commissioner for the Division of Banks.

Of the Internet sites that list APRs - a disclosure
required of banks under federal and state
truth-in-lending statutes - the rates typically range
from 300 to 500 percent on an annual basis, although
one listed an equivalent annual rate as high as 6,205
percent, according to the state report. Some payday
lenders are considered banks, while others are
nonbanks that may "rent" bank charters.

The payday lender typically gets its money back by
depositing the borrower's post-dated personal check or
making an authorized electronic debit from the
borrower's account. It makes its profits from the fees
attached to the loans.

The payday loan industry emerged over the last few
years, an outgrowth of federal legislation allowing
interstate banking, a decline in national finance
companies willing to make small loans, and
deregulation of interest rates. As a result, payday
loan outlets have proliferated in states that do not
regulate interest rates. Consumer advocates, community
activists, banking officials, and bank regulators have
increasingly raised concerns about some of the payday
lending industry's practices.

Last week, Donna Tanoue, chairwoman of the Federal
Deposit Insurance Corp., spoke out against one
industry practice in particular as "unbecoming" - that
of renting out a charter from a bank in a state
without interest rate caps in order to circumvent
another state's caps and set up a payday loan outlet
there. She ordered her staff to review what can be
done on a regulatory level about charter renting and
called on lawmakers and bank trade associations to do
their part.

"The practice of renting a charter merely to collect a
fee to allow a high-cost payday lender to circumvent
state law is inappropriate. It may be legal - but I
don't like it," said Tanoue in a speech before the
Greenlining Institute, a California organization
promoting economic development in low-income and
minority communities.

While Massachusetts has an interest rate cap of 23
percent and has been largely protected from payday
loan outlets, the appearance of Internet payday loan
sites may change all the rules.

"All the banking laws are geographically based. With
the Internet, you're dealing with a medium where
geography doesn't count as much as it used to," said
state regulator Antonakes.

And while Massachusetts regulators have not received
any complaints about payday loans, whether obtained on
the Internet or through a payday loan outlet, they did
shut down one payday loan outlet in downtown Boston in

Regulators said the outlet, inside a Mail Boxes Etc.
on Milk Street, illegally took applications and
processed documents for a Delaware bank for short-term
loans with APRs of more than 476 percent.

But payday lenders say they provide a much-needed
service to people who are in need of short-term cash
and have no other access to credit, to pay for an
emergency such as car repairs or a broken
refrigerator. Traditional banks rarely make loans in
small amounts.
In response to concerns about some of the industry's
practices, however, a national trade group of payday
lenders adopted reforms in January to curb abuses.
Members of the Community Financial Services
Association of America, as the group is known, must
comply with these "Best Practices":

- Full disclosure of service fee as both a dollar
amount and an APR.

- No threat or pursuit of criminal action against
customers who have not made payment on their accounts.

- Give customers the right to rescind their
transaction at no cost on or before the close of the
following business day.

- Provide consumer information about the responsible
use of payday loans and advise against long-term

- Limit rollovers of payday loans to four, if states
where they operate allow such rollovers.

"Payday advances are supposed to help consumers out of
financial trouble, not get them into it," said Billy
Webster, president of the Washington-based trade
group, in a statement accompanying the reforms.

But some consumer advocates, regulators, and
traditional banking officials remain concerned that
unsuspecting people will get into a cycle of living
from payday loan to payday loan, and they are trying
to do something about it.

"A payday loan is bordering, if you will, on loan
sharking," said Kevin F. Kiley, executive vice
president and chief operating officer for the
Massachusetts Banker Association. Over the last
several months, the 210-member industry group has
distributed more than 60,000 pamphlets entitled
"Beware of Easy Credit" to educate consumers about
predatory lending in general, although not
specifically about payday lending.

Kiley advised that people in need of short-term cash
seek out alternatives to a payday loan, such as a
credit-card advance, a home- equity loan, or a small
loan from a credit union, presuming they have access
to such alternatives.

And the Washington-based Consumer Federation of
America and the National Consumer Law Center, with
offices in Washington and Boston, have proposed model
state legislation to govern payday loans and license


Some Internet sites with consumer information about
payday loans:

- New Massachusetts
report "Internet Payday Loans - Risky Business,"
featuring a summary of 16 Internet payday loan sites
and the kinds of information they do or don't provide,
and the kind of personal information they ask for.

- National Consumer Law Center
Web site, featuring a report entitled "Payday Loans: A
Form of Loansharking," and model state legislation to
regulate payday lending.

- Direct link to
Consumer Federation of America's "The Growth of Legal
Loan Sharking: A Report on the Payday Loan Industry."

- Home page for the Community Financial
Services Association, the trade group for the payday
loan industry.