February 27, 2013
Online Payday Lending v. Online Gambling; How Can State's Enforce their Online Borders?
Posted by Christine Hurt

This Sunday's NYT featured a story that was framed as big, commercial banks being handmaidens of online payday lenders.  Bank customers get online payday loans and promise to repay in the form of granting ACH access to their bank accounts.  Then, even though the bank customers ask the bank to cancel the ACH, the bank does not and the customers get hit with overdraft fees.  Now, there's a lot of stuff to talk about in that story -- what sorts of rights, obligations do customers and banks have to cancel ACH agreements or close bank accounts when there is an agreement to allow a lender to take payments from a bank account.  And, I'm definitely not a banking guru who knows the answers to those questions.  Nathalie Martin at Credit Slips has a brief post.  Yesterday, JPMorgan Chase has vowed to change its policies now, according to this NYT blog post.

To me, however, I saw the interesting issue of how do states regulate online activity.  The article points out that many of these borrowers live in states that have outlawed or strictly regulated payday lending, but the borrowers borrowed money from online lenders, organized offshore but catering to domestic clients.  What power would the state have to say that the online loan was voidable or invalid?  What power would the state have to prosecute the lender for violating its state laws, even assuming the state could haul the lender in to face charges?

The problem of state enforcement of internet activity was one of the arguments made in support of the federal government to prohibit online gambling in the Unlawful Internet Gambling Enforcement Act in 2006.  The regulation of gambling was traditionally left to the states, and states had very different laws concerning what types of gambling were allowed within its borders (lottery, racetrack gambling, video gambling, casinos, etc.).  Two states, Utah and Hawaii, prohibited all gambling.  However, online gambling made different types of gambling available to all users, even residents of states where that type of gambling would be prohibited.  The UIGEA presumed that online gambling was prohibited under federal law (i.e., the Wire Act) and proceeded to prohibit and provide prosecution of those who facilitated it, namely banks and payment processors.  My understanding is that the UIGEA has made it much more difficult for Americans to gamble online (but not altogether impossible).  Some notable prosecutions of online gambling company owners have been successful as well.

So, back to online payday lending.  Regulation of payday lending is left to the states; some states have prohibited or otherwise regulated payday lending.  However, online payday lending has emerged to fill this void and serves customers in all states.  Banks facilitate the servicing of these loans by processing the automatic withdrawals.

So, should we have an Unlawful Internet Payday Lending Enforcement Act?

To further muddy these waters, today, Gov. Chris Christie legalized online gambling in New Jersey.  What about the UIGEA?  Well, the UIGEA criminalized online activity that was illegal in the particular state or federal jurisdiction, but didn't include bets that began and ended in particular state.  So, the DOJ (under different leadership than in 2006) issued a statement that seemed to say that intrastate internet gambling wouldn't run afoul of either the Wire Act or the UIGEA.  So, Illinois and NY can issue lottery tickets over the Internet, and New Jersey can allow its casinos to offer internet gambling to NJ residents.  Because the UIGEA wasn't really about state's rights, it was about state's money, and online gambling was cannibalizing state lottery and casino revenue.  Now, casino revenue is down, so NJ and Nevada want to harnass online gambling to reinvigorate the casino industry.

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