Senator Jeff Merkley (D-OR), Richard Blumenthal (D-CT), Dick Durbin (D-IL) and Tom Udall (D-NM) recently reintroduced the Stopping Abuse and Fraud in Electronic (SAFE) Lending Act. This bill attempts to address the issue of online lenders who have designed abusive products in order to evade state consumer protections.
As state legislatures across the country continue to crack down on abusive practices, such as triple digit interest rates and unfair payment and debt collection practices, the SAFE Lending Act will ensure that consumers get the same protections regardless of whether they take out a loan from a storefront payday lender or a lender operating online.
According to the Pew Charitable Trusts’ newest report and the Pew's first-ever nationally representative telephone survey, Payday Lending in America: Who Borrows, Where They Borrow, and Why, Americans spend $7.4 billion per year on payday loans, including an average of $520 in interest per borrower for eight $375 loans or extensions. Payday loans, which are marketed as two-week credit products for temporary needs, are in fact predatory short-term, high-interest loans, with borrowers paying an average of $520 in interest for eight $375 loans or extensions. According to the report, average consumers are in debt for five months and are using the funds for ongoing, ordinary expenses—not for unexpected emergencies.
In order to prevent payday lenders from evading the growing number of state consumer protection laws capping interest rates, U.S. regulators and Congress have begun scrutinizing some of the ways that payday lenders do business. For example, a number of payday lenders have partnered with Native American tribes in an attempt to evade the increasing number of restrictions being placed on payday lenders through state legislation, since tribal enterprises are not subject to states or federal law. In other words, these online payday lenders claim immunity from enforcement of state laws that cap interest rates and provide other borrower protections based on their partnerships with Native American tribes. Similarly, national banks that offer deposit advance loans at high rates with short repayment terms are also currently not subject to state consumer protections.
The SAFE Lending Act would allow states to petition the federal Consumer Financial Protection Bureau (CFPB) to stop lending by tribes in states where payday loans are illegal. That way, states would not directly litigate against tribes, thus preserving sovereign immunity. Specifically the SAFE Lending Act would:
- Require all online small-dollar lenders (such as payday lenders) to comply with state law if it provides better consumer protections than federal law;
- Prevent banks from making payday loans in violation of the state law where the consumer resides;
- Provide new federal enforcement measures to protect consumers from online payday lenders that seek to evade state consumer protection laws, such as by locating their businesses off-shore, or affiliating with a Native American tribe and claiming the right to assert the tribe’s sovereign immunity; and
- Empower Native American tribes to enlist the help of the CFPB where needed to protect their members from abusive payday lending on the reservation, and respect tribal laws that provide stronger consumer protections than are available under state law.
The SAFE Lending Act would also protect consumers’ bank accounts by:
- Closing the single payment loophole in the Electronic Fund Transfer Act and ensure that consumers have control over how lenders access their bank accounts for payment and collections of high-cost loans;
- Safeguarding consumers’ personal information by banning “lead generators” who collect information like Social Security numbers, income data, and bank account information; and
- Prohibiting lenders from using a borrower’s bank account numbers to create unsigned checks used to withdraw funds, even when consumers have opted out of making payments electronically.