Government authorities are trying to choke off the supply of borrowers to online lenders that offer short-term loans with annual interest rates of more than 400 percent, the latest development in a broader crackdown on the payday lending industry.
New York State’s financial regulator, Benjamin M. Lawsky, sent subpoenas last week to 16 so-called lead generator websites, which sell reams of sensitive consumer data to payday lenders, according to a copy of the confidential document reviewed by The New York Times. The subpoenas seek information about the websites’ practices and their links to the lenders.
The move is part of an evolving push by state and federal officials to curb payday lenders and their practice of offering fast money tied to borrowers’ paychecks. In August, Mr. Lawsky sent cease-and-desist letters to 35 online lenders ordering them to stop providing loans that violate state usury caps to New Yorkers.
Short-term lenders argue that when used responsibly, their loans can be a valuable tool for customers who might not otherwise have access to traditional banking services. The Online Lenders Alliance, a trade group, added that its members abided by all applicable laws.
Still, for payday lenders, the lead generator websites are a critical link, according to state officials. At first glance, the sites appear to be online lenders, prompting customers to enter their private financial data in applications.
To lure customers, the sites advertise fast cash, flash $100 bills and feature photos of smiling families, according to a review of the companies’ websites. MoneyMutual, one of the websites subpoenaed by Mr. Lawsky, promotes the talk show host Montel Williams as its spokesman. A recording of Mr. Williams greets callers to the company’s toll-free number.
A spokesman for Mr. Williams said that while his role is limited to being the company’s public face, “Mr. Williams is concerned any time a consumer has a bad experience with any product or service with which he is involved.”
Charles Goodyear, a spokesman for MoneyMutual, said, “Our lenders attest via their contracts with MoneyMutual that they operate within applicable federal or state law.”
None of the other lead generators contacted returned requests for comment.
Lead generator websites function as a middleman, ultimately selling the information, or “leads,” to the lenders.
With that financial information, the payday lenders can gain lucrative access to New Yorkers and make loans that exceed the state’s usury cap of 25 percent annual interest.
But such state interest rate caps can prove tough to police. Even as New York and 14 other states have imposed caps on interest rates in recent years, lenders have become nimble, moving from storefronts to websites. From that perch, where they find consumers across the country, the lenders can dodge individual state laws. With the help of the lead generators, the lenders have even greater access to reach borrowers — even in states where the loans are illegal.
Beyond their role in fueling the lenders, the lead generators, according to state officials, pass on customer information to other types of financial schemers. Regulators are increasing their scrutiny of how these sites function in the online lending ecosystem — an issue that has gained urgency with the proliferation of online lenders.
The administration of Gov. Andrew Cuomo of New York has also broadened its scrutiny in recent months to include the banks that enable lenders to withdraw money from customers’ bank accounts. Along with the lead generators, the banks are a crucial pipeline between consumers and payday lenders. Through an electronic transfer system known as A.C.H., or Automated Clearing House, the lenders can automatically withdraw loan payments from borrowers’ checking accounts.
Some state and federal authorities say the companies, including the lead generator websites, have frustrated government efforts to protect people from predatory loans, an issue that has gathered even more urgency after reckless mortgage lending helped precipitate the 2008 financial crisis.
Payday loans can come with annual interest rates that exceed 400 percent, according to an October summary from the Pew Charitable Trusts. For borrowers already on shaky footing, a single missed payment can lead to an even higher interest rate. On a $375 loan, a borrower can pay $520 in interest alone, according to the report. At the extreme, customers say their interest rates can soar beyond 1,000 percent.
Mr. Lawsky’s office is concerned that consumer information is also getting into the hands of swindlers. His office received complaints from consumers who said that they were inundated with calls after applying for an online payday loan.
When Myra Thomas, 42, received a call offering her a $1,000 loan from Capital Bank after she applied through a lead generator, she was pleased because she needed the money for a coming move. Money has been short for Ms. Thomas, a former truck driver who had to stop working because of illnesses.
To receive the loan, though, Ms. Thomas had to send $375 to the company — money she says vanished. Ms. Thomas never received the loan or her $375 back. The website she used to apply for the loan is one of the lead generators subpoenaed by Mr. Lawsky.
The Online Lenders Alliance said that its members, which include some of the lead generators, vigilantly guard customers’ personal information to prevent fraud.
“Unfortunately there are bad actors who fraudulently misrepresent themselves as legitimate companies, in some cases by duplicating website branding to deceive consumers,” Peter Barden, a spokesman for the group, added.
Mr. Barden said the group reported all instances of fraud to the Federal Trade Commission and other law enforcement agencies.
But, for Ms. Thomas, one experience of fraud is more than enough to turn her off payday loans entirely.
“I won’t do it again,” she said. “I’m just going to have to figure out something else.”