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Fight Raging Over Payday Loans in the State Of New York
June 5th, 2011
Check-cashers cry “they are a service to communities”
It’s all happening in Albany over legislation that would permit non-banks to make high-cost short-term loans in New York, but at rates exceeding the state’s usury limit.
The bill, pending in the state Legislature, would allow licensed check-cashers to make small loans. Currently, they are barred from making loans.
Limited loans
The new loans would be limited to between $300 and $2,000, and would be for terms of at least 90 days but no more than six months. The bill includes other provisions which supporters say will protect consumers. However, consumer advocates, led by New Yorkers for Responsible Lending, denounce the proposed loans as tantamount to controversial “payday” loans that are common in many states but illegal in New York. They say passage of the bill would set a precedent and lead other businesses to say they should be allowed to make such loans.
Exempting
Consumer advocates are angry over a provision exempting the loans from the 25 percent usury cap on rates for small personal loans. “What they’re seeking is a carve-out of New York’s usury law,” said Sarah Ludwig, co-director of the Neighborhood Economic Development Advocacy Project, and part of NYRL, a coalition of 151 groups. But the check-cashers and their supporters, including the bill sponsor, reject the criticism.
Check cashers
Check cashers also say they are in the best position to help with small credit needs because they’re still in communities that banks have left, and they understand their customers. “We’re trying to do something that fills people’s needs and does it in a responsible and regulated way, and nobody else is,” said Edward P. D’Alessio, deputy general counsel for the trade group, Financial Service Centers of New York.
Battle
The battle marks the most significant effort in recent years to bring payday lending and its variations into a state that has long fought it. For several years the check-cashers have been trying to get such legislation passed, and a similar bill reached the Senate floor last year. “They’ve been salivating to get this through,” Ludwig said.
Short term loans
Because of the extremely short duration of the loan, the flat-rate fees for every $100 borrowed often equate to annual interest rates of several hundred percent. And since many of the borrowers are short on funds, they renew and increase the loans an average of seven times, driving up the fees and debt. As a result, the loans have been denounced for years by consumer advocates.
Loan supporters
The bill’s supporters say that consumers already get payday loans amounting to about 8 million a year, according to a study by Cypress Research commissioned by the check-cashers, so it would be better to regulate them to prevent abuse. And even opponents acknowledge a need for very small loans. Under the legislation, loans would be capped at 25 percent of the borrower’s gross monthly income. Payments would be made in installments every month or every two weeks, not in one balloon amount at the end, and the payments must equal no more than 10 percent of gross monthly income.
One at a time
Borrowers may not take out more than one loan at a time, and the industry would fund a database of such loans to ensure compliance. Unlike a payday loan, these loans could only be refinanced once, if the borrower has made three straight on-time payments. The bill includes the right of the borrower to cancel the loan for one day. No collateral would secure the loan, and the bill bans criminal prosecution to collect unpaid money. Finally, the bill directs the banking superintendent to set the maximum rate, factoring in the check-cashers’ operating costs and losses for the business, and ensuring a “reasonable” rate of return.
Reward for risk
“You’ve got to have some reward for your risk,” D’Alessio said. “Anybody who is going to go into an area and make small-dollar loans should be enticed to make at least a little profit. Otherwise, nobody’s going to do it.” The legislation is opposed by the city of New York, labor unions, AARP and the Navy-Marine Corps Relief Society. The bill has passed the Senate Banks Committee and is pending in the Finance Committee and the Assembly Banks Committee. The legislative session ends June 20. The governor has not weighed in.
Farley Promises To Amend Check-Casher Loans
May 22nd, 2011
Senator Hugh Farley caused quite a commotion and evoked strong reactions from responsible lending advocates like the AARP and NEDAP, the Neighborhood Economic Development Advocacy Project, when he advanced a bill through the Senate Banking Committee which is designed to allow check cashers to offer short-term loans to their customers, most of whom reside in lower income suburbs.
Akin to PayDay loans
The AARP and NEDAP groups said this was akin to PayDay lending, in which people are given an advance on the money in their paycheck, typically for one or two weeks in exchange for a fee. The fee doesn’t seem like a lot, say $10 out of a $500 paycheck, for example, but it rises to a usurious percentage when converted to the annual interest rate. Currently, PayDay loans are illegal in New York.
Desperate
According to Sarah Ludwig, co-director of NEDAP, “If you listen to the check cashers, there are New Yorkers who desperately need these loans which are not available to them. However, they conveniently leave out the fact that the bill entails a carve-out of the state’s usury laws, and would enable them to make loans without even determining borrower’ ability to repay. The fact that many New Yorkers are struggling to make ends meet does not justify the legalization of exploitative lending practices. This bill is not in the best interests of the public.”
Farley’s bill
Under Farley’s bill, interest rates would be determined by the head of the new Department of Financial Services. As written, he “shall” consider interest rates for similar loans in other states and what might make the loans profitable. “This will lead to triple-digit annualized rates!” said Ludwig. Farley said the bill would be amended.
“That was put in by the people that want the bill to give the superintendent some direction,” he said. “They’re talking about payday loans. This is not the same thing.”
Legislation’s intent
Farley went on to defend the legislation’s intent as providing credit to people who otherwise could not get it. “In these areas, and particularly in New York City, there are no financial institutions, banks, or anything else in the poorer areas. Check cashers provide a haven like a financial oasis. This arrangement would allow people to get a small loan for three or six months,” he said.
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