“The fact remains that for the many years that I sat on this committee and considered bills concerning payday lending, the bottom line is we ask DFI every year for the number of complaints they received. There were none, none. Repeatedly year after year we could find no evidence of complaints [through] DFI. Now that has certainly changed in the last year, because now DFI reports that the Washington law that limits eight payday loans per year, now they’re turning to unlicensed Internet payday lenders and here are the complaints. Hundreds of them. Not one before the law, now all of these after the law. … Now I would rather have my constituents doing business with a licensed regulated entity that DFI can control. But we have no way of regulating out of state or out of country [lenders].”

Several stories this week have surfaced on this issue, and for a Friday we thought you might want to watch some video coverage. As mentioned in the story, the latest report out of the DFI in Washington shows that, of the licensed entities of which the DFI tracks, consumers paid $122 million dollars less in payday loan fees than they did in 2009. But what we want to know is whether or not these numbers include unregulated entities? Does the DFI accurately portray the full lending picture in Washington?

Such restrictions on payday lending would merely force consumers to use higher cost providers, some of which are unregulated and unlicensed. In the wake of the Washington state restriction, some regulators and legislators said that they have seen an increase in consumers turning to unlicensed and unregulated lenders who may operate beyond the reach of state regulators.

Unlicensed lenders are not accountable to the state either through state examination or compliance standards. DFI’s enforcement chief said that even if the agency can get a subpoena to go after an illegal lender, it’s difficult to get a response and difficult to enforce the subpoena because the lender is either out of state or in another country.[1]

The Washington State Department of Financial Institutions is warning consumer about fraudulent online lenders.

When it comes to protecting the public from itself, state Rep. Steve Kirby, D-Tacoma, has undergone a change of heart.

… But now, one year after the new restriction went into effect, Kirby argues that the eight-loan limit is driving cash-strapped borrowers to “the Wild West” of the Internet, where they can be victimized by unlicensed lenders who observe no caps on the number and size of loans.

“The evidence would seem to indicate that consumers are seeking higher cost, unregulated products,” said Kirby, a Tacoma Democrat. He said the eight-loan cap was sending customers into “the wild west,” a world of unlicensed Internet loans where fees are higher and credit limits don’t exist.

Some state legislators have realized that the crackdown on payday lending may have had unintended consequences. A bill to remove the 8-loan limit is scheduled for a hearing in Olympia Thursday.

“Internet payday lenders who are not willing to abide by Washington law are not welcome to do business with Washington consumers,” DFI Director Scott Jarvis said. “As the state regulator, it’s our job to enforce the consumer protection laws adopted by our legislators – businesses refusing to play by the rules should take note – and be prepared for DFI to take action against them.”

Last year, the Washington state legislature passed serious new restrictions on payday loans: small, high-interest loans that are essentially advances on your paycheck. But did Olympia go too far?

“I’ve been doing this since 1989,” said Kevin McCarthy, owner of the local Check Masters chain, which specializes in payday loans, check cashing, and other financial services. “We knew it wouldn’t be good. I don’t think any of us realized just how catastrophic it would be.”

The new rules, which limit customers to 8 loans per year at any Washington institution and puts a $700 cap on each loan, have cost McCarthy his business. Revenue was down 60 percent in the first half of 2010, and 12 of his 22 stores have already closed. The rest will shut down within months, and his 150 employees will be looking for work.

How is this good for consumers?

Katherine Mangu-Ward wrote a tour-de-force of a feature story in October 2009’s Reason Magazine describing how many people have come to rely on payday loans to make rent or utility payments. Indeed, in many cases, payday loans are the only method that the working poor have to stave off eviction or cancelled electricity. Yet Washington State has now ensured that those same people will no longer be able to appeal to pay day loan shops when they are in a tough spot.