Web site steered U.S. borrowers into bad, illegal payday loans: CFPB

WASHINGTON (Reuters) - The U.S. agency charged with protecting consumers from financial abuse took on a little-understood area of payday lending, where websites sell information on people looking for short-term, small loans, and fined a California company on Wednesday for steering borrowers into illegal and bad debts.

The U.S. Consumer Financial Protection Bureau has been working for more than a year to finish a rule that would restrict payday loans, short-term debt that is not collateralized and is historically repaid by a borrower's next paycheck. The loans are popular with people with low incomes, and are frequently used to cover the expenses of an emergency.

A final version of the rule is expected to be released soon.

The bureau imposed a $100,000 fine on California company Zero Parallel LLC, which as a "lead aggregator" identifies potential borrowers and then sells their information. The action shows the agency has its eye on the online side of the industry, which crosses state lines and has grown in recent years. Potential borrowers fill out web forms and then are immediately sent to a lender's site to take out the debt.

According to a CFPB statement, Zero Parallel sold applications to lenders it knew did not follow states' usury laws, interest-rate restrictions and prohibitions on who can make the loans, and kept borrowers in the dark about risks and costs.

Zero Parallel simply sold leads to the highest bidders, according to the CFPB, and borrowers did not know they were taking out illegal loans.

Payday lenders mostly charge flat fees instead of interest and frequently allow borrowers take out new loans to cover outstanding ones - all of which can add up to a borrower ultimately paying four times the amount of the original debt.

Zero Parallel will pay the fine without admitting or denying the allegations, the CFPB said. The agency also said it had reached an agreement with Zero Parallel's owner, Davit Gasparyan, to resolve similar charges filed last year against his previous company, T3Leads, with a $250,000 fine.

Zero Parallel did not return calls requesting comment.

The CFPB said loans that did not comply with laws in borrowers' states of residence were void and cannot be collected.

Before the 2007-2009 financial crisis, payday loans were regulated by the states. But the 2010 Dodd-Frank Wall Street reform law charged the CFBP with taking a federal role overseeing the industry and setting a nationwide regulation to help keep borrowers from falling into expensive debt traps.

(Reporting by Lisa Lambert; Editing by Frances Kerry)