No One Is Safe: Payday Lenders’ Shady Practices Make Identity Theft Easy

As a libertarian, I accept that any relatively free society will tolerate certain disreputable business models and inadvisable personal choices. As a general principle, adults should largely be free to make their own decisions, even if they’re unwise. And prohibitionist policies just send destructive behaviors — drug use, prostitution, loan sharking — onto the black market.

We tolerate such things even though we understand these practices usually harm those who willingly engage in them. Consider it one price we pay for relative freedom. But what should we do when these practices destroy the lives of innocent bystanders?

In particular, I’ve been thinking about payday lenders — those less-than-ideal lending companies that offer short-term small loans and charge obscene interest rates. It’s not unusual for annualized percentage rates to exceed 400 percent or even 600 percent in some places. No one in their right mind — or who isn’t in desperate financial straits — would consider loans at these terms.

It’s legal usury. Lenders collect absurdly high levels of interest, taking advantage of the predicament of the borrower. Those who take out these loans can quickly find themselves in a deep pit of unpayable debt. The lenders obviously know they are lending to the highest credit risks, so they charge sky-high interest rates and fees to cover the risks. It’s the ugly underbelly of the financial world.

Hitting up payday lenders for a few hundred bucks to make rent probably is better than losing one’s apartment. It’s certainly better than seeking the services of the neighborhood loan shark, who comes to collect with a crowbar rather than a regulated debt-collection agency. That it serves a need is its best defense, although far from any kind of endorsement.

California places lending limits and interest caps on payday lenders to protect borrowers. But none of that protects the rest of us. Payday lenders generally don’t run credit through major credit bureaus. Therefore, they are susceptible to identity thieves, and victims don’t get notice of fraudulent new loan apps because these lenders don’t use the bureaus. Their lax standards leave everyone — even those of us who would never do business with such firms — vulnerable.

Last year, my health care provider was the target of a massive data breach. I’ve since been victimized by fraudsters who have repeatedly applied for credit cards, loans, and bank accounts in my name. It’s been stressful, unsettling, costly, and time consuming. Alert emails from financial institutions have ruined many a nice evening. It just doesn’t stop.

Identity theft is a sad reality of modern life. The U.S. Department of Justice reports that nearly 24 million Americans have been victims in the past year. That’s not payday lenders’ fault, of course, but they are the weak link in the financial chain. After I learned of the breach, I locked my credit at the three major credit bureaus so that no one could open a loan. But fraudsters are clever.

I then started receiving applications for accounts with the online financial services company Chime — the same company recently hit with a $2.5 million fine from the California Department of Financial Protection and Innovation for its customer-complaint handling. (Based on my repeated calls to their customer-service department, I’d say that fine isn’t nearly enough.) Chime is not a lender, but fake accounts can abet money laundering and other financial crimes.

Then fraudsters started applying for online payday loans in my name. It started as a trickle. I’ve since been inundated with perhaps 150 emails and numerous calls from cheesy loan companies asking me to complete my loan application.

I tracked down a pending fraudulent loan, but now it’s Whac-A-Mole. Regularly, dozens more come into my inbox. I’m not sure which are actual fraudulent loan paperwork, phishing expeditions, or low-rent marketing emails. I thought my credit was secure because of my credit freezes, but because payday lenders don’t rely on credit apps with the bureaus, there’s virtually nothing I can do to stop it.

“The easiest way to stand out from the crowd for payday loan companies? Offering fast, frictionless lending,” wrote Bence Jendruszak of SEON Technologies. “As you can imagine, this is the perfect opportunity for fraudsters. Faster credit scoring means fewer verifications.”

Identity theft victims in these cases are at the mercy of whatever standards these lenders do or don’t have. I’ll no doubt have to spend months trying to clamp down on applications, lest I be stuck with payday loans in my name at interest rates that can pile up in a hurry — and the resulting legal battles. There’s no government agency or private credit bureau that can help. I can’t possibly track down all the potential loan apps.

Because one sector of the lending industry doesn’t seem to follow responsible practices, the identity theft epidemic will continue unabated. Again, as a libertarian, I wouldn’t ban payday lenders no matter how distasteful I find them. But the California Legislature could, say, require them to run applicants through a major credit bureau (thus providing an alert if someone applied for a fraudulent loan). This would at least protect the rest of us from becoming collateral damage to this shady business model.