Last week I drafted a piece on the mounting evidence that payday lending is bad for consumers. I am happy to say that I had to throw that piece in the recycle bin.
On Monday, Superintendent Ben Lawsky sent a letter to NYS Assembly Speaker Sheldon Silver saying that the NYS Department of Financial Services opposes the “short-term financial services loan act” (A.1113-A/S.3999-A), legislation that would permit licensed check cashers in New York to make small dollar loans.
Lawsky’s letter states, “The bill creates an exception to New York’s criminal usury law for licensed check cashers. By setting a 25 percent cap on interest rates, the bill obscures the true impact of these loans. In fact, when taking into account all of the fees permitted by the bill, the actual annualized interest rates consumers would pay balloon into the triple digits. The payday loans envisioned by the bill are the types of loans that the current 25% criminal usury cap was designed to keep out of New York.”
This comes on top of actions taken last week by federal regulators in proposing stronger guidance around deposit advance products. The standards proposed by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) would, among other things, require the banks they regulate to take into account the borrower’s ability to repay the loan and to limit the number of loans made to a borrower to six per year.
Also last week, the Consumer Financial Protection Bureau (CFPB) released a study showing that payday or deposit advance loans trap consumers into a cycle of debt, leading to ruined credit for the borrower and billions of dollars in wealth being stripped from low and moderate income communities and neighborhoods of color.
According to the CFPB, “Lenders often do not take a borrower’s ability to repay into consideration when making a loan. Instead, they may rely on ensuring they are one of the first in line to be repaid from a borrower’s income. For the consumer, this means there may not be sufficient funds after paying off the loan for expenses such as for their rent or groceries – leading them to return to the bank or payday lender for more money.”
This likely defeat of New York’s Short Term Financial Services Loan Act is a huge victory for consumers in New York. Nevertheless, as noted in a NY Daily News editorial, we need to continue to be vigilant in keeping usurious payday lending and deposit advance products out of New York.