Calif. investigating role of lead generators in high-cost lending
California Gov. Jerry Brown’s administration is scrutinizing the role that online lead generation firms play in steering cash-strapped consumers into larger loans than they want or need.
The state’s Department of Business Oversight sent letters Wednesday to 20 nonbank lenders that charge triple-digit annual percentage rates, seeking information about their use of online referrals.
The agency also said that it is considering whether to write regulations that would allow the state to provide greater oversight of lead generation sites. Consumers who search the internet for loan options often end up on these companies’ websites, which collect borrower information and then sell the leads to high-cost lenders.
“We know from our enforcement work that California consumers who want loans with interest-rate limits are steered by online lead generators to lenders who only make high-cost loans that have no rate caps,” department Commissioner Jan Lynn Owen said in a press release.
The steps announced Wednesday demonstrate the Brown administration’s frustration with the political influence that high-cost lenders wield in California, where a quirk of state law has enabled nonbanks to earn bigger profits from large consumer loans than smaller ones. The actions also reflect the growing role that internet search results play in shaping the behavior of subprime borrowers who cannot qualify for bank loans.
California’s actions will likely be watched closely by officials in other Democratic-leaning jurisdictions, which often follow the lead of the nation’s largest state.
Last year, 58.7% of unsecured personal loans of $2,500 or more in California were made online, according to state data. Many of them had annual percentage rates of 100% or more.
“Lead generators, especially those who operate online, play a significant and growing role in borrower acquisition,” Owen said. “In California, much of the activity is unlicensed and harmful to consumers. This problem needs to be fixed.”
Under California law, the interest rate that can be charged on consumer installment loans of under $2,500 is capped at around 30%. But starting at the $2,500 threshold, the state has no rate cap, which provides lenders a strong financial incentive to steer prospective borrowers into larger loans.
In May, Golden State lawmakers defeated legislation that would have capped interest rates at 36% for certain larger consumer loans. Also this year, the legislature killed a bill that would have required lead generation firms that operate in California to be licensed by the state.
That proposal was backed by the Brown administration, which on Wednesday signaled its interest in taking steps to rein in high-cost lenders even if it does not have the legislature’s backing. The state’s longtime Democratic governor leaves office in January, and his successor will have the ability to appoint a new commissioner at the Department of Business Oversight.
The letters sent Wednesday went only to lenders that last year made a substantial number of $2,500-$9,999 loans with triple-digit APRs in California. Companies on the list include some of the biggest names in short-term consumer lending, such as Enova International, Elevate, Cash America and Ace Cash Express. None of those companies responded immediately to requests for comment on Wednesday.
The letters ask the lenders to report how many of their customers are acquired through the use of online lead generators. They seek information about how lead generators get compensated. They also inquire about whether the companies’ loans get underwritten differently depending on whether the borrower went to the lender directly or was referred by a lead generator.
Additionally, the letters ask the lenders to disclose how many of their borrowers who were referred by lead generators first indicated that they wanted loans of less than $2,500.
Mary Jackson, the CEO of the Online Lenders Alliance, a trade group that represents both lenders and lead generators, said that most of the data that the state is requesting is already available in annual reports that lenders in California are required to filed.
“This is a complex issue, which is why lead generators have been actively engaged with the California [Department of Business Oversight] working toward a pragmatic solution for smart regulation and legislation,” she said in an email.
“We will continue to advocate for policies that enable our members to fairly and appropriately market and underwrite loans to the hundreds of thousands of Californians who do not have prime credit and would otherwise be left without options.”
Nationally, the lead generation industry has been facing closer scrutiny as online lending has become more popular in recent years.
In 2013, New York officials sent subpoenas to 16 online lead generation firms that they suspected were deceptively marketing loans that were illegal in the Empire State.
Last September, the Consumer Financial Protection Bureau entered into a consent agreement with Zero Parallel LLC, a lead generation firm that allegedly facilitated consumer loans that authorities deemed were likely to be void under applicable state laws.