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The city of San Francisco alleges in a lawsuit that two city-licensed payday lenders and their online affiliates are colluding with a Delaware bank to market short-term loans at illegal interest rates to low-income borrowers. The suit, filed on April 26, is the latest in a protracted litigation war between the payday lending industry on one side, and consumer advocates and government entities such as the U.S. Department of Defense on the other. [Related article: Cash now, pay later, NLJ 3-20-06]. City Attorney Dennis J. Herrera has accused Check ‘n Go California Inc. of Mason, Ohio, as well as Berwyn, Pa.-based Monetary Management of California Inc. and their various subsidiaries of working with First Bank of Delaware of Wilmington, Del., to get around state regulations regarding payday and installment loans. Herrera v. Check ‘n Go of Calif. Inc., No. CGC-07-462779 (San Francisco Co., Calif., Super. Ct.). A payday or “deferred deposit” loan is a small, short-term cash advance to a customer with a bank account and a steady income � typically with a bad credit history. Payday lenders are heavily regulated in California. A consumer installment loan is a short-term loan that may be made by a state-chartered bank whose charter is issued by another state. Such banks are exempt from the limits and requirements of the California Finance Lenders Law and California Deferred Deposit Transaction Law, but brokers or other nonbank lenders are not. Herrera claims that the payday lenders are the actual lenders of high-yield consumer installment loans that they claim only to broker, and that they engage in “bait and switch” tactics to steer borrowers to the loans, which can carry interest rates exceeding 400%. But John Rabenold, a spokesman for Check ‘n Go, said that he is confident that the city attorney’s investigation will show that both Check ‘n Go and First Bank of Delaware comply with the state deferred deposit transaction law. Check ‘n Go is accused of making installment loans that only banks are allowed to make, but Rabenold said it merely has been marketing a legitimate First Bank of Delaware product along with the other lawful services it provides. First Bank of Delaware did not return a call for comment. Earlier last month, Steven M. Weisbrot of Nagel Rice in Roseland, N.J., took aim at Internet payday lenders in a class action filed on behalf of Margaret O’Shea of Philadelphia against Direct Financial Solutions of North Logan, Utah, also doing business online as Cash Central and Quick Payday. O’Shea v. Direct Financial Solutions LLC, No. 070401054 (Philadelphia Co., Pa., Ct. C.P.). Weisbrot said that payday lenders, who were regulated out of Pennsylvania last year, now illegally operate their business in Pennsylvania via the Internet and unlawfully charge Pennsylvania consumers annual percentage rates ranging from 466% to 2,000% on short-term payday loans. Direct Financial Solutions did not return a call left for comment. No attorney has entered an appearance yet for Direct Financial. Meanwhile, consumer advocacy groups such as the Center for Responsible Lending in Durham, N.C., are concerned that the Defense Department’s newly proposed regulations on payday lending to service members have been weakened so much that lenders will be able to get around them. These regulations, posted for comment from last month through June 11, stem from last fall’s legislated 36% cap on all loans to service members included as a provision of the department’s authorization bill for 2007. [Related article: Congress caps 'payday' lending, NLJ 10-11-06]. The Defense Department, concerned that high-interest debt hurts morale, identified payday lending in 2005 as one of 10 key “quality of life” issues.

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