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Attorney general sues three online payday lenders

Minnesota Attorney General Lori Swanson filed three separate lawsuits this week against online payday lenders that made instant short-term loans over the Internet to Minnesota citizens that grossly exceeded the interest rates allowed under state law and otherwise failed to comply with state licensing rules and consumer protections.

The lawsuits were filed against Eastside Lenders, LLC of Delaware; Global Payday Loan, LLC of Utah; and Jelly Roll Financial, LLC of Utah. None of the three companies has a license with the Minnesota Department of Commerce that allows them to make small consumer loans to Minnesota residents.

All three companies charge borrowers $30 in interest for a $100 two-week loan, which is a 782 percent annual interest rate. In addition, Eastside's website offers loan repayment periods as short as eight days, providing for the annualized interest rate on a $100 eight-day loan to be 1,368 percent. Global Payday's website offers loan repayment periods as short as four days, providing for the annualized interest rate on a $100 four-day loan to be 2,737 percent.

Attorney General Swanson and Dana Badgerow, President and CEO of the Better Business Bureau of Minnesota and North Dakota, said that the current economy has led many people to look for instant payday loans on the Internet. A payday loan is a short-term, high-interest loan, often under $500, targeted at borrowers who need money between paychecks. The contract generally requires the borrower to pay back the loan in 14 days, or less, when the borrower's next paycheck arrives. The Attorney General and BBB today warned citizens to be on guard against Internet payday lenders that evade state interest rate laws and consumer protection laws by operating online without proper state licensure and that in some cases make unauthorized withdrawals from consumers bank accounts.

"Many people are in a tight spot financially and looking for help, but Internet payday lenders that purposefully evade state laws can make a tough financial situation even worse," said Attorney General Swanson. She added: "People who take out payday loans from unregulated Internet lenders hope to borrow a small amount of money that they'll repay soon. But the high interest rates, recurring finance charges, and other traps can cause the amount of the loan to explode until it becomes unmanageable."

"Desperate times are leading people to the Internet to apply for payday loans and many are falling deeper into debt after getting tangled up with a lender who has zero regard for the law," the BBB warned in a consumer advisory.

Numerous payday loan websites operate on the Internet. A customer generally types in their personal information, including their Social Security and bank account numbers, and the loan is deposited into their bank account within hours. If the loan is not repaid on time--generally within two weeks--hefty finance charges are automatically debited from the consumer's bank account every two weeks. The borrower can soon rack up interest and finance charges that far exceed the amount of the original loan.

Some Internet payday lenders try to evade state lending and consumer protection laws by getting licenses in states without meaningful regulations, by operating without state licenses at all, or by setting up operations outside of the country and claiming that loans are made subject to the laws of the home country. Minnesota law was amended effective August 1, 2009 to clarify that online payday lenders that lend money to Minnesota borrowers are subject to the requirements of Minnesota law even if the lender is physically located in another state.

Minnesota payday lending laws contain several consumer protections. For example, for loans less than $350, Minnesota law caps the fees that may be charged on a sliding scale as follows: $5.50 for loans up to $50; 10 percent plus a $5 fee on loans between $50 and $100; 7 percent (minimum of $10) plus a $5 fee on loans between $100 and $250; and 6 percent (minimum of $17.50) plus $5 fee on loans between $250 and $350. For loans between $350 and $1,000, payday lenders cannot charge more than 33 percent annual interest plus a $25 administrative fee. In addition, payday lenders must itemize their fees and interest charges in their contracts, and state law prohibits certain unfair contract terms. (See attached handout, "Highlights of Minnesota's Payday Loan Laws.")

Both Eastside and Global Payday have "F" ratings with the Better Business Bureau, and Jelly Roll is unrated. All three lawsuits seek to enjoin the companies from violating state law, and also seek restitution for consumers and civil penalties.

The Internet payday loan industry reported Internet loan volume of $7.1 billion in 2008, compared to $35 billion in payday loans made at stores. (Source: The Capital Times, "Online payday loans pose new challenges for consumers, regulators," Feb. 22, 2010). The online payday loan industry claims to make short-term online loans to over 12 million customers annually. (Source:

The Attorney General and BBB gave the following advice to consumers:

--Some Internet payday lenders skirt state consumer protection laws. Before doing business with an Internet payday lender, make sure it is licensed to operate in Minnesota by checking with the Minnesota Department of Commerce. You may check the Commerce Department website online at or you may call (651) 296-6319.

--Check if the Internet payday lender is complying with state interest rate caps and other state consumer protections.

--Be wary about giving out information online to unknown Internet companies. This can expose you to potential privacy and identity theft risks. Disreputable Internet companies can use your bank account information to make unauthorized withdrawals and drain your account.

--Know the full cost of the loan you are taking out. Compare annual percentage rates and finance charges to those available through other lenders.