In view of the numerous predatory practices of some lenders of online loans, the CFSA or the Community Financial Services Association of America has imposed new online lending practices to provide comprehensive protection for consumers. According to the CFSA President, Darrin Andersen, “Appropriate state regulations provide strong protection for consumers, while ensuring continued access to choices for short-term credit needs. That same principle should apply in cyberspace.”

The CFSA is a national trade association that represents payday lenders. The new online lending practices will require all members of CFSA to follow state laws and regulations governing payday installment loans and must be licensed in each state before they do business.  Payday installment loans are legal and regulated in 35 states in the US. These states impose usury limits and set the cap for the annual percentage rates (APR) on these loans. The remaining 15 states (Arizona, Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Vermont, and West Virginia) don’t allow these loans and have banned them according to their current laws and statutes.

Although there are laws to protect the interest of consumers when getting payday installment loans, there are still lenders who have found ways to pervert these laws by working with the so-called “nationally chartered” banks based in a state that don’t have a usury ceilings. Another common practice of predatory lenders is to charge interest rates within the legal limits but have expensive processing and late fees.

The federal government works against these predatory practices; however, their efforts seem inadequate. As more laws are imposed, more ways have been found by lenders to violate the law. Because of these problems, some states are now placing limits on the number of loans that a consumer can get at any one time. This has already been enforced in the states of Florida, Illinois, Indiana, Michigan, New Mexico, North Dakota, Oklahoma, South Carolina, and Virginia. They have set up databases that require all licensed lenders in their state to verify the eligibility status of a consumer prior to granting any loan. This may be a bit hassle for consumers who wants to get instant cash, but this is the only way to help protect them and to reduce predatory practices of some lenders.

In response to these problems of payday lending, the CFSA has also done its part by imposing new online lending practices to be fair to lenders who have been doing their business legally and value their reputation. In addition to the mandatory membership requirements, the CFSA requires all their members to adhere to the new Online Lending Best Practice Policies:

1.    Full Disclosure of Requirements. The contract between the member and the consumer should include fully outlined terms of the payday installment loan transaction. They should also disclose the computation for the cost of the service, in dollar amounts and as an annual percentage rate (“APR”).

2.    Compliance to ALL applicable state laws. A member should not charge a fee or interest rate that is not authorized by state or federal law.

3.    Truthful Advertising Schemes. All advertising and marketing campaigns must not be false, misleading, or deceptive. Responsible ads and promotions must be upheld at all times.

4.    Consumer Responsibility Information. A member should inform consumers of the uses of the payday installment loan services. This includes placement of a “Customer Notice” on all marketing materials (mass media, social media, e-mail and other promotional materials).

5.    Rollovers. Rolling over of loans (an extension repayment option where payment of fees is paid instead of the outstanding balance) is not allowed unless authorized by state law and are only limited to 4 rollovers or depending on the state limit.

6.    Right to Rescind. Consumers must be given the right to rescind or cancel, at no cost, a payday installment loan transaction on or before the next business day.

7.    Reasonable Collection Practices. All due accounts must be collected in a reasonable, fair and lawful manner. Unlawful threats, intimidation, or harassment should not be applied to collect accounts. Members are required to adhere to the collection limitations in accordance to the Fair Debt Collection Practices Act (FDCPA). A member should not threaten or pursue criminal action against a consumer in case of payment defaults.

8.    Extended Payment Plan. A member should provide consumers with an extended payment plan with a longer period at no additional charge. A consumer shall be allowed to use the extended payment plan at least once in a 12-month period. This option should be adequately disclosed to consumers.

9.    Military Best Practices. Members of the military in active duty are given special consumer protections that include: (1) prohibition from collecting military wages as payment for loans and on contacting the military chain of command to collect payment; (2) establishment of information or educational activities about financial matters.

10.    Display of the CFSA Membership Seal. A member shall prominently display on its website or in a conspicuous place in its store the CFSA Membership Seal. This is to inform consumers of the company’s affiliation with online lending practices mandated by the association.

As the CFSA President has stressed, “By requiring CFSA members to provide Internet loans in accordance with the laws of the state in which the consumer resides, we are taking an important step toward ensuring that this service is both convenient and safe for them.”