Authorities in Vermont unveiled a novel approach Wednesday to the crackdown on online payday lending: they sent a warning to search-engine providers and TV stations that the lenders use to advertise their products.
"In the same way that they wouldn't hopefully knowingly advertise for drug cartels," Vermont Attorney General William Sorrell said in an interview, "we're advising them that these are companies that are not duly licensed to do business in Vermont. So please don't run their ads for publication for Vermonters."
Vermont has some of the toughest laws in the nation with respect to payday lending. The state caps annual interest rates at 24%, and a 2012 state law imposes liability on anyone who assists illegal lenders.
That two-year-old law is unique among the 50 states. It enabled the Vermont attorney general's office to take a series of steps, announced Wednesday, that are aimed at stamping out online payday lending in the state.
Most notably, the AG's office sent letters to Google, Yahoo, Microsoft, Comcast, DirecTV, Dish Network and the Vermont Association of Broadcasters, notifying them that it's a violation of Vermont law to knowingly provide substantial assistance to an unlicensed lender. Online lenders rely heavily on TV and web ads to generate business.
The letters do not argue that the TV providers and search-engine companies are violating Vermont law, but they don't absolve the firms of legal responsibility, either. The letters ask the companies to stop running ads for any lender that is not authorized to operate in Vermont.
"Hopefully they'll voluntarily comply, so that we don't have to cross that bridge of trying to prove their liability under Vermont law," Sorrell said.
Vermont's 2012 law is also the basis for actions announced Wednesday against two companies that have processed payments on behalf of online payday lenders.
The AG's office filed suit against a North Dakota-based company, Intercept Corp., which allegedly processed payments on behalf of companies that made illegal loans.
At the same time, Vermont authorities announced a settlement with a California company, T$$, LLC, that similarly processed payments for online payday lenders. Under the settlement, T$$ denied that it violated Vermont law but agreed to pay restitution to consumers of up to $150,000.
Numerous other states, including New York, West Virginia and Illinois, have taken actions designed to end unlicensed online payday lending to their residents.
But no state besides Vermont has a law that imposes liability on companies that assist the lenders. Vermont officials hope that their law will become a model.
"I believe that other states are considering similar legislation," Sorrell said.
The state-level enforcement efforts come as federal authorities are also seeking to crack down on online payday lending. The federal push includes Operation Choke Point, a Department of Justice investigation into fraudsters' use of the bank payment system, and connected efforts at banking agencies such as the Federal Deposit Insurance Corp.
The federal crackdown has drawn protest from banks, payment processors, payday lenders and even some state regulators, who worry that legitimate businesses are being swept up in the dragnet.
It's harder to make that argument in Vermont than in many other states, because all payday lending is illegal in the Green Mountain State. But some online payday lenders, including lenders owned by Indian tribes, argue that they're immune from being sued by the states where their customers live.
The Vermont AG's office estimates in a 17-page report released Wednesday that some 5,000-8,000 residents or roughly 1% of the state's population have obtained Internet loans.
Vermont's actions Wednesday include lawsuits and settlements with online lenders, as well as cease-and-desist letters sent to 81 companies that officials say have made at least one illegal loan in the state. One of the largest companies loaned nearly $1 million to 427 Vermont residents during a three-year period, according to the AG's office.
"I think this is a clear and decisive action to make it clear that online lenders need to comply with the consumer protection laws of the state of Vermont," said Tom Feltner, director of financial services at the Consumer Federation of America. "This is clearly using all the tools available."
Authorities in Vermont are also seeking help from the state's banks and credit unions in their push to stamp out illegal lending. In a letter to the Vermont Bankers Association, the AG's office asked banks whose customers may have taken out online payday loans to maintain a higher level of vigilance about illegal loans. Typically payday lenders directly debit borrowers' bank accounts.
"We're being asked to play a role," said Christopher D'Elia, president of the Vermont Bankers Association, "and I think it's going to be up to the individual institutions as to the extent of their involvement."