photo © 2008 Dewet | more info (via: Wylio)“Good morning! My name is Edwin Brown and I’m from the California Department of Corporations. I’m here to examine your payday loan records for compliance. I’ll be looking for exceptions and proposing enforcement actions against you and your payday loan company. I’ll be with you for the day…”
Did I get your attention? Leave here now if payday loan regulations and compliance is boring!!
Alright! It’s time to step back from our previous reflections on “Sovereign Nation – Tribal Models,” “Offshore Payday Loan” approaches and some of the other esoteric stuff and get back to basics.
Now payday loan compliance and enforcement might not appear to be a particularly exciting subject for you, but for those of us who have been greeted at the door to our business in the early AM by a state regulator, it can be the beginning of a NIGHTMARE! And don’t you Internet guys think you’re immune from this because you’re not.
Some of this will be pretty basic to more than a few of you. But these mistakes are being made every day by members of our industry – NOT A GOOD THING!
And obviously, the payday loan licensing model you’re operating under will dictate much of this including definitions such as “consumer credit” to include payday loans, vehicle or title loans, and tax refund anticipation loans (loans); “covered borrower” to include military members or their dependents; “Creditor” as any person engaged in the business of extending credit (lender), “domicile” where does the loan take place, and much more.
SO… check YOUR state/province and federal laws!
On to VIOLATIONS…
A) Military Lending
All our readers are aware that federal law regarding members of the military and their families requires lenders to:
- Limit military annual percentage rates of loans to no more than 36%
- Disclose rates and payment obligations
- Identify whether loan applicants are covered borrowers (Military members or their dependents)
Where many of us are missing the boat is in not realizing this military identification process must be performed on ALL SUBSEQUENT LOANS; not just the first loan! The status of your borrower may change so don’t blow this! A “standard covered borrower identification statement” (military member declaration) MUST be provided to the loan applicant PRIOR to becoming obligated on the transaction, must be signed by the loan applicant indicating she is not a covered borrower and must be substantially similar to the following statement:
“Federal law provides important protections to active duty members of the Armed Forces and their dependents. To ensure that these protections are provided to eligible applicants, we require you to sign… “I AM a regular or reserve member of the Army… OR, I AM a dependent of a member of the Armed Forces… OR I AM NOT a regular or reserve member of the Army…”
This “covered borrower identification statement” must be completed and signed by the loan applicant FOR EVERY LOAN!
B) Depositing of Checks
In many states and provinces, your payday loan written agreement must describe the manner in which your customer’s check will be deposited and the specific date of deposit.
Your agreement should specify if you may elect to deposit your customer’s check by electronic means, including ACH transactions. As a general guideline, per your agreement, you may deposit a customer’s check one time for the full amount after your bank dishonors the initial deposit of your customer’s check.
C) Internet Businesses
More and more states and provinces are insisting payday loan Internet businesses be licensed in order to serve their residents. I’ve discussed state licensing models, choice-of-law models, Sovereign Nation and Offshore Models, CSO Models, zero-licensing approaches MANY times in the past so we won’t go there now. Suffice it to say, state and provincial Attorney Generals are “dialing for dollars.” So… get up to date on this topic!
D) Prepaid Debit cards
This is a really HOT topic! Pre-paid debit cards will play a significant future in the payday loan industry. Again, I’ve written on this topic many times. For now, be aware that in many locales, a payday loan licensee CANNOT REQUIRE a customer to purchase a prepaid debit card as a condition for qualifying for a payday loan. Charging fees for the initial purchase or use of a prepaid card is frowned upon as well (California for example).
e) Small Claims
In many locales, other than court costs and filing fees, the recovery of fees in excess of amounts prescribed by your payday loan regulations cannot be had. Treble damages for NSF customer checks is typically not allowed as well.
7) Simultaneous Loans
You’ve deposited your customer’s check to close out a previous payday loan and you issue another. The following day you’re notified by your bank that your customer’s check is NSF. You now have two loans outstanding with the same customer. In California, you’ll be fined! What about your state?
8) Third Party Collections
It’s typical for a payday loan licensee to be responsible for ensuring that third party collection agencies NOT collect any amounts from borrowers that exceed what is permitted by the licensees state/province payday loan regulations. THIS IS SCARY! On top of this, licensees must maintain complete records disclosing payday loans transferred to third parties and the amounts those third parties collected from the borrowers!! Or, did you sell your bad debt? Who to?? What does this mean to you??? There are several offshore payday loan collection companies calling me every day to purchase/work bad debt…
9) Rescission and Cooling-off Periods
Do not attempt to collect your fees when your payday loan customer rescinds their loan during the time frame specified by law for rescission or cooling-off periods! It’s a violation!
10) Excess Loan Amounts Collected
A borrower pays off a loan in cash AFTER the borrower’s check has been deposited in the bank. Then, the borrower informs you that the bank will return their check NSF. The borrower then pays you an NSF fee of $15 in cash. BUT, the borrower’s check DOES INDEED clear their bank after all. You’ve just collected double the amount of the loan and an NSF fee of $15; not kosher and a violation if discovered!
A borrower makes partial payments pursuant to a payment plan and fails to pay off the loan or fails to comply with the terms of the payment plan. You deposit your borrower’s original check for the full amount of the payday loan. Once this check clears, you’ve collected dollar amounts in excess of the loan equaling the total of the partial payments – A VIOLATION!
You allow a borrower to pay a loan off by credit card and charge your customer additional fees for the privilege.
You charge your borrower for postage, labor costs, certified mail fees, telephone calls… for collection activities.
You elect to cash your borrower’s check at their bank and you’re charged for this. You cannot collect these fees from your borrower.
You elect NOT to deposit your borrower’s check due to verification that the borrower’s bank account does not have sufficient funds to cover their check. You cannot charge an NSF fee anyway.
Failure to conspicuously post your license in your place of business.
Failure to conduct your payday loan business under the name contained in your license
Failure to maintain sufficient books and records that allow the licensing department to determine if you’re in compliance with all rules, regulations and maintaining Agreements and evidence of customer checks.
Filing a false Annual Report.
Failure to disclose in advertising that you’re licensed.
Making payday loans for time periods in excess of prescribed law
Failure to disclose all fees in view of the public or in letters not at least 1/2 inch in height.
Debiting a borrower’s bank account electronically multiple times for less than the full amount in order to recover the outstanding loan balance.
Exceeding maximum fee prescribed by law.
Charging additional fees for entering into payment plans.
Allowing a borrower to enter into multiple payday loans.
Charging a borrower ACH stop payment fees.
Leaving blanks in Agreements to be “filled out later.”
How much will these types of violations cost you? In California, $2500 per violation per incident! So… if you made just one of these errors 10 times since your last audit, $25,000! That’s a lot of payday loans at $15 per $100 loaned.
Bottom line? KNOW YOUR STATE/PROVINCE PAYDAY LOAN LAWS!And if you’re using the Offshore, Internet or Sovereign Nation Model, May peace be with you!
Comments? Ideas? Attacks? Rants? Tell me!