SACRAMENTO — California business regulators are stumbling in their efforts to find and ban an unlicensed form of high-interest consumer credit: payday loans available on the Internet.
For three years, the state Department of Corporations has been trying to force these Internet-only businesses to adhere to the same rules that govern the state-licensed payday loan stores that offer short-term, unsecured loans of up to $300.
But many of these Internet lenders -- with no physical presence in the state and run as tribal entities outside of California -- say they are Indian-owned businesses, linked to sovereign Indian nations and immune from state regulation.
"These are businesses, and they are operated consistent with federal law," said John Nyhan, a Los Angeles attorney for two out-of-state Indian tribes whose loan operations are being targeted by California regulators. "They have immunity from suit by the state."
The legal concept of treating Indian tribes as sovereign nations repeatedly has been upheld by the U.S. Supreme Court, he said.
The state says it respects tribal sovereignty but has an obligation to enforce its consumer laws and protect people who borrow money in California.
The tribal arguments, so far, have stymied ongoing efforts in court to prohibit the Indian-based Internet companies from lending money to Californians.
State officials across the nation and consumer advocates say it's impossible to estimate the size of this unregulated industry. But they suspect that it involves thousands of websites generating billions of dollars in revenue nationwide.
Regulated payday lenders, which operate from storefronts, collect about $8 billion a year in interest and fees on $50 billion in loans, according to industry sources. In California, state-licensed payday lenders lent $2.5 billion to 1.4 million people in 2006, the latest year for which figures are available.
In August 2006, the California Department of Corporations issued a desist-and-refrain order against four Internet payday loan operators, accusing them of violating California law.
Among other things, the law requires that the businesses be licensed by the state, that loans be capped at $300 and that interest is limited to an annualized percentage rate of 459% for a maximum 31-day period.
Since then, the order has stalled in state courts over the sovereign immunity issue.
"Internet lending in general is something we've tried to get our arms around, and the tribal issue is a further complication," said Department of Corporations spokesman Mark Leyes. "Any California customer who is dealing with these lenders is not enjoying the consumer protections that are in state law."
Those protections give consumers the ability to file complaints with state regulators, who can intercede on behalf of borrowers and discipline Internet lenders by fining them or lifting their licenses. Currently, 16 Internet lenders are licensed by the state and must comply with the same rules as brick-and-mortar companies, Leyes said.
Getting a payday loan from an Internet operator, especially one not licensed by the state, is riskier and more dangerous than borrowing from a storefront lender, consumer advocates warn.
"This is a debt trap on steroids," said Jean Ann Fox, director of financial services for the Consumer Federation of America, an advocacy group in Washington.
While payday loan stores require customers to give them a signed personal check that can be cashed when the loan is due, typically in 14 days, Internet lenders require an electronic authorization that allows them to repeatedly debit a person's bank account, she said.
"They can go back every payday and take a finance charge out" if the loan isn't repaid within one pay period, Fox said. "It becomes very hard for consumers to reclaim control of their checking account."
That's what happened to Tami Scarcella, a single mother of three from Murrieta, who succumbed to a junk e-mail pitch and borrowed $1,500 over the Internet to get some extra money for Christmas. "I absolutely, 100% made a mistake," she said. "They are scamming people big-time."
Scarcella thought she was dealing online with only one lender, ameriloan.com, but a number of others literally popped up on her computer screen. She wound up getting five $300 loans electronically deposited into her bank account.
Scarcella rolled over the loans a couple of times, paying a $95 fee per loan that was taken out of her checking account. But on the third rollover, the trouble began. Her employer's direct deposit was delayed inadvertently, leaving Scarcella without enough in the bank to cover the fees when they came due.
Scarcella alerted the lenders about the problem, but "all five started hitting my account [electronically] three times per day," she said. The lenders charged $20 for each attempt to take money, while her bank charged her $2,500 in bounced-check fees before freezing her account.