It all started with three parking tickets.

Robert Bradley, of Jamaica, Queens, a 64-year-old hospital worker, had been low on cash and neglected to pay the first ticket, then the second — and soon he was worried that his car would get towed. "I took out a payday loan thinking that would solve the problem," he says. He started with a single loan for $300 from PDL Loans, also known as Piggy Bank Cash Loans. The company's address is in Nevis, West Indies, but Bradley easily found it on the Internet. Then, as now, the site promised rapid approval — and money in his checking account in a matter of hours.

That was in June of 2010. As is often the case with payday borrowers, Bradley's finances were already fragile. He was focused on the cash he needed then, not the consequences he'd face later. He paid off the first loan on July 9 — $390 for a $300 loan — and took out another $350 on July 28 with the same lender. This time PDL seemed to withdraw payments from his account at random, and never enough to pay off the loan. As costs for that loan ballooned, he needed even more money. He took out a third loan in August, which led to two more in September. By December he had taken out a total of 11 loans from 10 different online lenders.

Bradley thought each loan would be straightforward. "It was supposed to be a one-shot deal," he says. "I got the money in one shot, I'm gonna pay it off in one shot. It wasn't supposed to go on month after month." Bradley, who received his paycheck via direct deposit, expected each lender to electronically deduct the full balance of his loan from his checking account two weeks after the loan was made. But by his account, based on a review of his bank records, each lender withdrew less than the full amount of the loan, making successive deductions that were never enough to bring his balances to zero. To Bradley, the withdrawals had no rhyme or reason, and they had the effect of pushing him further into the hole as fees, penalties, and interest piled up.

"They were taking just the interest, then they would come back and do the same thing [again]," he says. "They didn't touch principle."

One by one, as he got behind, the calls started coming in: He'd paid $880 on a $300 loan from AmeriLoan Credit, but the lender said he still owed $550. He'd paid $1,225 on a $500 loan from Advance Me Today, which had PO Box in San Jose, Costa Rica — its Website no longer lists one — but the lender claimed he owed another $550.

By January 2011, US Fast Cash Credit, owned by AMG Services Inc., a corporation chartered by the Miami Tribe of Oklahoma, wanted $250 more after he'd already paid $945 on a $400 loan. GECC Loan (also doing business as Cash Direct Express), CCS Loan Disbursement (also doing business as Community Credit Services), Sure Advance Loan, Tior Capital, Loan Shop, and My Cash Now were all calling him at home and at work, though he never reached anyone who could answer questions about his accounts. By February, he had borrowed a total of $4,445 and had paid back $8,240. Altogether, his lenders said still he owed another $4,134.

By the time Bradley sought help to escape his snowballing financial disaster, he had closed his checking account, destroying a 20-year relationship with his bank. "I had nothing against the bank," he says. "I just wanted to stop these electronic withdrawals that weren't going to pay off the loan. And the bank was taking out fees when the loan payments didn't go through."

It was a paralegal at the Neighborhood Economic Development Advocacy Project (NEDAP) in Manhattan, an advocacy group that opposes predatory lending, who finally told Bradley that none of these lenders should have been able to charge Bradley such high rates or touch the money in his bank account. Payday loans are illegal in New York State.

An elusive industry for regulators

According to the Consumer Federation of America, only 18 states ban or strictly regulate payday loans. New York's ban is one of the nation's toughest. Whether they're made online or at a strip mall, loans with triple-digit APRs (annual percentage rates) violate the state's 1976 usury law, which caps rates at 16 percent. The state lacks the power to regulate commercial banks — such as Bank of America, Chase, and Wells Fargo — who are overseen at the federal level and allowed to charge 29 percent or more on credit cards. But payday lenders are considered non-banks, so licensing and regulation fall to the states. Any non-bank lender who charges more than 16 percent interest in New York is subject to civil prosecution; charging above 25 percent can subject lenders to criminal penalties. First-degree criminal usury is a Class C felony that carries a maximum sentence of 15 years.

In 2004, when Elliot Spitzer, then attorney general, discovered that lenders were circumventing the state law by lending on-line, he sued one of the lenders, Las Vegas-based Cashback Payday Loans, and shut down servers in the state that had been throwing up payday loan Websites, forcing Cashback to pay restitution to customers. In 2009, a year before Bradley got his first Internet payday loan, then-attorney general Andrew Cuomo settled with County Bank of Rehoboth Beach, Delaware, which let Pennsylvania-based Internet payday lenders Telecash and Cashnet use its bank charter to make Internet payday loans in New York. A $5.2 million settlement was distributed to more than 14,000 New Yorkers who had taken out their online loans, with some burned borrowers receiving more than $4,000.

Despite the successive lawsuits, Internet payday loan companies never stopped lending to New Yorkers. Consumer advocates and state regulators alike say that Robert Bradley's experience is hardly unique. "The use of the Internet to evade New York's strong consumer protections against payday lending and its exorbitantly high interest rates is a serious concern," says Benjamin Lawsky, the state's superintendent of financial services. "Payday lenders should know that making loans to New Yorkers puts them at risk of prosecution and that they have no legal right to collect on any loans they make here."

Payday loans, whether made by storefronts or on the Internet, are defined by their relatively small dollar amounts and excessive annual percentage rates (APRs), which routinely run to three and four digits. Bradley's first loan, for example, with a $90 fee on a $300 two-week loan, was the equivalent of a 782 APR, according to payday loan interest calculators.

Payday lenders first surfaced at check-cashing stores in the South and Midwest about twenty years ago, and remained regional enterprises throughout the 1990s.
By 2003, there were only about 3,000 payday storefronts in the entire country. Today there are around 20,000.

The number of Internet lenders is smaller, but then again a single Website can reach many more people than a storefront can. In a January 2012 report, San Francisco based JMP Securities analyst Kyle Joseph, an expert on the industry, put the number in the hundreds. Jean Ann Fox, director of consumer protection at the Consumer Federation of America, says estimates range from 150 to 250 Internet payday lenders operating nationwide. Peter Barden, a spokesperson for the Online Lenders Alliance, an Alexandria, Virginia–based trade organization representing Internet lenders, says his organization has over 100 members, and that "a reliable industry estimate" on the number of lenders is 150.

John Hecht, in a January report for the San Francisco-based investment bank JMP Securities, found that 35 percent of all payday loans were made on the Internet in 2010. Hecht, now an analyst at Little Rock investment bank Stephens Inc., believes market share will likely reach 60 percent by 2016.

Like storefront lenders, online lenders state prominently that they don't check credit scores — part of a strategy to market to those with tarnished credit. PDL Loans, for example, Bradley's first lender, proclaims, "Bad or no credit ok" ; another of Bradley's lenders, US Fast Cash, says, "Even bankruptcy, bounced checks, charge-offs and other credit hassles don't prevent you from getting the cash advance you need!"

And lenders typically tout the speed with which loans are closed. AmeriLoan, another of Bradley's lenders, says, "It's easy to get the funds you need in seconds" ; PDL Loans offers a "3 minute application" and "instant approval." Virtually all promise to deposit the loan to your checking account by the next business day.

The places where payday loans are banned or tightly regulated — Arizona, Arkansas, Colorado, Connecticut, Georgia, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont, Washington, DC, and West Virginia — are home to some 60 million people who are old enough to get a payday loan, a market that the Internet lenders seem to believe is worth tapping. Advance America, the largest publicly traded payday lender, and Cash America, the second largest, both make payday loans online. While opening a store in a state with a payday ban is too conspicuous to be practical, the Internet is a good place to hide.   

Some online lenders take pains to avoid states that have bans or restrictions. Some will deny you a loan because you live in a state with a ban, like New York — then send you to a lead generator [see sidebar] that will identify a lender for you. Others only stop when confronted by regulators. According to one expert on the industry, "Lenders like CashNetUSA fought hard to keep states like Arizona, Maryland, and Pennsylvania in the fold — and only backed off when the state attorney general's office went after them."

Yolanda Walker, vice president for corporate communications at Ft. Worth-based Cash America, owner of CashNetUSA, would not address the particulars of the firm's battles with state governments, but says "customers nationwide should have access to credit options when and where they need them."

"If state lawmakers decide to eliminate or restrict access to these credit products, legitimate lenders will exit the state and cease to serve these consumers despite the negative impact on their choices," she adds. "In states such as New York, customers who are faced with restricted access to credit options are currently being served by lenders who operate offshore or outside the auspices of state law — a risky move for consumers who deserve the right to do business with reputable lenders."
        
Questions of legitimacy, however, are at the heart of the matter. "These businesses operate illegally and in the shadows," says Doug Pierce, co-founder and head of research at New York-based Digital Due Diligence, a provider of market analysis with a focus on mid-cap Internet firms. While some have off-shore addresses, Pierce says the vast majority are US enterprises. He cites a January 2012 law suit by the Arkansas attorney general against PDL Support, which does business in Arkansas, providing collection services to Bottom Dollar Payday Loans. "In the payday lender's reply to the state attorney general, the return address was hand-written as an address in Nevis," Pierce says, "but the postmark was in Missouri."

Pierce says online payday lenders almost always use private registration domains for their records on WHOSIS — a system that stores registered users, domain names and IP addresses — to avoid being tracked.

Depending on the search engine, typing in "New York payday loan" yields an unpredictable variety of hits. Some lenders claim street addresses that are nonexistent, but give the appearance of a physical presence in the state. Delta Payday Loans indicates that it has locations in Poughkeepsie, Hempstead, Mt. Vernon, and Watertown, NY, with customized url's for each city. New York Cash Advance Payday Loans claims a New York City address at 118 Fulton Street, Suite A, which is actually a UPS store in lower Manhattan. (Click the url, however, and you are likely to end up at CashNetUSA.com, the Internet platform for Cash America, the nation's second largest publicly traded payday lender.) An employee at the UPS store says that people come in all the time asking for New York Cash Advance, "but we don't know where they are, and we've been here since 2004."

One Google search in June for New York payday loans turned up Paydayloansonlinepolo.com, which openly flouts the state's payday lending ban. "There are many states in the country that regulate or prohibit payday and cash advance loans," its website states. "When you are looking for New York payday loans, you do not need to worry about any of that, however, because there are no laws in place, making them easier to get."

When asked whether online lenders were violating usury laws in states like New York, Barden, of the Online Lenders Association, says, "We're not out there giving legal advice. The laws can be murky. Those who operate online will interpret them differently and it's not just our industry. There are companies that determine that these laws are applicable to them and don't issue those loans in those states. Then there are companies that determine that these laws are not applicable to them." Barden adds that the OLA is "very high on fighting fraud" and points out that member firms are required to adhere to a "fairly strict" code of conduct and a set of best practices.
        
The web interface — and the loan documents and disclosures a borrower receives — vary widely depending on the lender. A federal regulator, who spoke on background and has reviewed multiple payday loan Websites, describes the process this way: "First you enter your bank account information, your Social Security number and your drivers' license number. Five or six screens later, you come to a pull-down screen where you punch in the amount of the loan. After you select the amount, you get a loan note and then the loan contract — and then you see the APR and the amount financed. The next day you'll likely get an approval email with the loan documents attached. You're not required to print them, but if you don't save them, the chances are you won't be able to get copies from the lender."

Jean Ann Fox, the consumer advocate, says, "I've often heard from [debt] counselors that consumers don't save or print these forms at the one opportunity they have and then can't get back or retrieve that information."

The disclosures can be difficult to find. At PDL Loans, Bradley's first lender, visitors are met with the slogan "Don't Break Your Piggy Bank, Get a Cash Loan as Soon as Today!" The disclosures are not available until after you click on "Apply Now," which takes you to Piggy Bank Cash Loans; then a Terms and Conditions button takes you to the disclosure screen. At PDL Loans and other sites, you won't get a loan until you surrender the right to sue the lender.

Regulators trying to keep up

As payday lending migrates to the Internet, federal regulators have been slow to play catch up. Between 2000 and 2007, the Federal Trade Commission (FTC) brought only one enforcement action against an Internet payday lender, but the regulator has brought 15 since 2008. In a lawsuit filed in April, the FTC asked a Federal Court in Nevada to halt allegedly illegal business tactics used by 10 separate lenders while the agency pursues its case against them. When I described the details of Robert Bradley's Internet loans to Nikhil Singhvi, an attorney in the FTC's bureau of consumer protection and the lead attorney on the case, he saw parallels with one firm in the FTC's complaint: AMG Services Inc., based in Overland, Kansas, and affiliated with the Miami Tribe of Oklahoma.

"AMG had a contract that told consumers that if you paid the amount financed and a one-time finance charge — that would pay off the loan," says Singhvi. "What AMG did instead was withdraw only the finance charge and leave the principal unpaid, later claiming those payments taken from the consumer were only finance charges and did not reduce the principle. The consumer then pays many multiples of the borrowed amount and many multiples of the amount that it should have taken to pay off the loan." The consumer would never know, he says, when — or if — the loan would be paid off.

This is exactly what happened to Bradley. For example, one of his lenders, US Fast Cash Credit, withdrew 12 payments for varying amounts over a period of four months. By the time he closed his bank account, he had paid $945 on a $400 loan and still had a $250 balance.

In a new tactic, the FTC claims in this and another recent lawsuit that a demand by Internet lenders that borrowers agree to pre-authorize electronic withdrawals from their account is a violation of the Electronic Funds Transfer Act. Passed in 1978, the act predates the Internet but anticipated e-commerce, as credit cards were then gaining wide acceptance.

That preauthorization, Singhvi says, "had the effect of allowing lenders to withdraw from the consumers much more than the consumers thought they had to repay." The FTC cases also allege that conditioning the loan on that authorization is itself a violation of the act. Both suits are still pending, but if the FTC prevails, it could be a blow to the Internet payday industry. "Cutting off the payday lenders priority claim on a borrower's bank account," says Fox, the consumer advocate, "is a direct assault on the industry business model."
        
The FTC's April lawsuit included sworn declarations from two New Yorkers. Josephine Bongiovi, a tour guide from Middle Village, Queens, took a $300 loan from One Click Cash and another $300 from US Fast Cash — one of Bradley's lenders — in June 2011. After the lenders withdrew several payments from her bank account, Bongiovi received calls from them at home, on her cell phone, and at work, many times a day, demanding more money, even though her account was current. By July, both lenders had threatened to sue her if she didn't pay her balance immediately.

Bongiovi wrote to both lenders, retracting permission to withdraw funds from her account and asked her bank to bar the lenders from making withdrawals. She opened a new account at another bank, but both lenders managed to make withdrawals from the new account as well. She has made numerous offers to pay off the principal but not the escalating fees, which she believes are illegitimate. Both lenders have refused.   

Eric Barboza, also of Middle Village, borrowed $500 from US Fast Cash in October 2011 and after paying $650, thought the loan was paid off. Instead he was met with demands for more money, including finance charges which he believes were not laid out in the original loan agreement. By December 2011 Barboza, who has two small children and a wife with multiple sclerosis, was receiving phone calls threatening him with arrest. He received so many calls at work that he feared his job was in jeopardy. He filed complaints with the Better Business Bureau and the FTC and then finally agreed to pay off the loan by May. According to his calculations, the $500 loan ultimately cost him $1,300.

Both Barboza and Bongiovi asserted in their declarations that their lenders had deducted payments to cover interest while leaving their principal untouched, just like what happened to Bradley.   
                
So far, the state's occasional enforcement efforts have had little impact in the ability of online lenders to do business in New York. Neither the state's Department of Financial Services nor the Office of the Attorney General would comment on whether they have any enforcement actions in the works. "I suspect they're still unhappy that these guys are still making loans to New Yorkers," says Russ Haven, legislative counsel to the New York Public Interest Group, of the Department of Financial Services. "It undermines the value of the state [banking] charter and subverts the regulatory authority of the Department of Financial Services. It creates an unlevel playing field."

But federal action may be in the offing. The spate of recent lawsuits coming out of the FTC may be bolstered by enforcement actions by the new Consumer Financial Protection Bureau, created by the Dodd-Frank financial reform bill of 2010. Richard Cordray, the bureau's newly appointed chief, has promised to give the industry "much more attention"; he held his first public hearing on payday in January in Alabama and released a manual, Short-Term, Small-Dollar Lending Procedures, to guide bureau examiners, who he said would be visiting banks and payday lenders across the country. Spokesperson Michelle Person declined to comment on any specific enforcement plans.

Robert Bradley was reluctant to speak about his personal finances at first, but did so in the hope of preventing others from ending up in his predicament. "I didn't know what a payday loan was when I got into this," he says. "Now I know. They're like loan sharks. They might as well have been trying to break my knee caps."

This article was reported in partnership with The Investigative Fund at The Nation Institute with support from the Puffin Foundation. Research assistance: Robert Owen Brown.