In theory, any entity that lends money to a California resident whether operating from a physical storefront or online has to be licensed and follow California laws. In theory, too, the California Department of Corporations and California's attorney general can go after unlicensed lenders and shut them down.
In practice, however, as The New York Times reported last month, payday lenders are setting up online operations sometimes in foreign countries or on Indian land to evade state laws, and they are being aided by large banks.
Certainly, limits on payday lending are needed. As we have said many times, payday lending amounts to modern-day usury. In California, the average payday borrower pays $450 in fees to get $255 in cash.
Other states are better. Some states limit annual interest rates to 36 percent following the federal limit for payday loans to people in the U.S. military. Sixteen states and the District of Columbia ban payday lending.
State limits are thrown to the wind, however, with unlicensed online payday lenders. That is the new frontier that state and federal regulators must address.
Unlicensed online payday lenders require borrowers to give their bank account information, so they can make automatic withdrawals from the borrower's account to pay back the loan.
The banks processing these transactions including Wells Fargo, Bank of America and JPMorgan Chase are licensed and regulated. Regulators should aggressively pursue banks that allow unlicensed online payday lenders to plunder customer bank accounts.
The state and the federal government should do more to educate the public. Consumers don't often know who is licensed in California. And when unlicensed online lenders take customers to court to collect on usurious loans, judges may not be aware they are dealing with an unlicensed entity which has no right to collect on an illegal transaction.
Consumers and judges can check if a payday lender is licensed by the Department of Corporations: www.corp.ca.gov or (866) 275-2677. But that is not the same as shutting down unlicensed operations.
At the federal level, Oregon Sen. Jeff Merkley has introduced legislation (S. 172) to cap payday loan interest rates, as the federal government does for payday loans to military personnel, and close loopholes on online and offshore payday lending sites.
We should not throw up our hands and say, "Borrower beware." Online lending must be brought to heel. If traditional banks refuse to act responsibly, the Legislature and Congress should force the issue.