You may see many things in New York: iconic landmarks, the bright lights of Broadway and a teeming mass of humanity. What you won’t see is something found on nearly every corner in many other major cities – payday lenders. These “no credit check, get cash quick” short-term loan shops that charge more than 25% annual interest are strictly illegal in New York. And that includes “cash with a click” online operations.
New York state’s Department of Financial Services (DFS) began investigating these “predatory” lenders – some of whom charge more than 400% in annual interest ¬– over a year ago. The problem is, without a physical presence in such a lucrative market, payday lenders have gone online to circumvent the state’s usury law.
Four in five people who take out a payday loan extend it, or roll it over, at least once before paying it off, according to Richard Cordray, chief of the U.S. Consumer Financial Protection Bureau, which has been investigating the industry. Many borrowers – some 12 million Americans – get caught in “spider webs of debt’’ by using these products, Cordray has said. The agency is weighing the need for national rules to rein in lenders.
“Too many borrowers get caught up in the debt traps these products can become,’’ Cordray said at a payday loan hearing held in Nashville, Tenn., earlier this year. When borrowers roll over the debt, what was created in the 1980s as an emergency source of funds instead becomes a burden, he said, and “the consumer ends up being hurt rather than helped by this extremely high-cost loan product.’’
Most states specifically permit these short-term loans, often made through the lender’s acceptance of a deferred-deposit check in exchange for cash, but many of them have even lower interest-rate caps than New York’s, according to information compiled by the National Conference of State Legislatures. Among the 38 states with such laws, many also set limits on loan amounts and term lengths. Even those without specific payday lending statutes – including New York – have laws that effectively ban the practice.
To get around the state’s barriers, payday lenders have developed websites enticing New Yorkers to take out loans with rates as high as 1,095%, according to the DFS. Without face-to-face contact, the lenders have tried to collect these debts through electronic payment and debit networks. The DFS has urged banks to help stop such actions by identifying and preventing these online transactions. At least one financial institution – Bank of America – has already accepted the challenge.
The bank is the first to tap into New York’s database of companies that have been subject to action for illegal payday lending, defined as relatively small personal loans that are due in a short period of time and carry rates in excess of the state’s 25% legal maximum. Cross-referencing the data with its own information and “know your customer” procedures is expected to help the bank identify companies that may be illegally collecting payments electronically from New York consumers’ accounts.
In April, MasterCard and Visa joined the effort, agreeing to work with DFS to help halt illegal payday loan collections through their networks. The credit card companies promised to “take appropriate action” – including barring illegal transactions made by lenders, as well as alerting financial institutions that process the payments.
The enhanced enforcement is also targeting “lead generators” – businesses that use phone banks or the Internet to find prospective payday loan customers and sell their names and contact information such as phone numbers to lenders. The DFS says these boiler rooms may be engaging in deceptive and misleading marketing.
Debt collectors have also been warned about working with payday lenders in New York. The DFS notes that payday loans made in New York or to state residents are “not valid debts and cannot be lawfully collected.”
New York officials say the proactive strategy is working. Additional banks are expected to sign up for access to the database of illegal lenders, and the DFS says that since it has been providing the information to banks and payment networks, many payday lenders have been stopped.
Neon sign image via Shutterstock
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