The Washington State Department of Financial Institutions issued a cease and desist order today to payday lender MoneyTree, Inc., for repeatedly violating provisions of recently passed legislation, that amongst other things, limits customers to eight payday loans with a 12-month period.
From the DFI order:
1.2 Unauthorized Rescission of Small Loans and Exceeding Number of Loans. From about January 1, 2010, to present, Respondent has repeatedly engaged in the following practice: Respondent permits borrowers to obtain one or more small loans from Respondent, then borrowers are permitted to “rescind” the loans several days later, up to and including the due date, for the purpose of obtaining a new larger loan or for extending the terms of the existing loan. The amount of the rescinded loan is then removed from the Veritec system, resulting in the loan not being tallied against the borrower’s statutory limit of eight small loans in any 12-month period.
1.3 Substantial Injury to Public. The effect of the above-described condut is that borrowers are able to obtain more than the statutory maximum eight small loans in any 12-month period, contrary to RCW 31.45.073. Additionally, the conduct results in an unfair advantage for Respondent over those licensees that limit borrowers to eight small loans in any 12-month period.
The investigation was launched after a tip to State Sen. Adam Kline’s office from a MoneyTree customer who described the scheme as a common payday lending practice. After receiving six loans from MoneyTree, the customer service representative advised her of the eight-loan limit, but told her that if she needed more than eight loans, they could roll her previous loans into one, allowing her take out seven additional loans over the 12-month period.
According to emails I have obtained, a subsequent DFI review of database records uncovered 104 accounts at three MoneyTree locations where customers at or near the eight-loan limit had their previous loans “closed administratively prior to new loans being given.” DFI examiners were dispatched to these locations this week, and confirmed the findings.
DFI administrators speculate that MoneyTree might outrageously claim that these loan consolidations are within statutory guidelines, but to this non-lawyer at least, RCW 31.45.073 seems pretty damn clear:
4) A borrower is prohibited from receiving more than eight small loans from all licensees in any twelve-month period. A licensee is prohibited from making a small loan to a borrower if making that small loan would result in a borrower receiving more than eight small loans from all licensees in any twelve-month period.
I suppose it’s conceivable a court might rule that MoneyTree has discovered a legal loophole in the new payday lending statute, but there’s no question that their rescission practice constitutes a blatant violation of the spirit and intent of the law. The whole purpose of this provision was to prevent the borrower from having a small loan spiral into an insurmountable debt at an annualized interest rate of 391%, a purpose that MoneyTree’s actions totally undermines.
The irony is that even these hard won payday lending reforms were a feeble compromise compared to the more sweeping bills the industry successfully fought off. Sen. Kline sought to limit the APR to 36%, the same maximum interest rate that may be charged to military personnel under federal law, while other proposals sought to merely halve or quarter the industry’s usurious rate.
But if this is how the industry responds to what can only be described as a legislative victory, perhaps it’s time to go back to the table and ban payday lending entirely.