Testimony before NYS Senate and Assembly committees, regarding online lending

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TESTIMONY OF NEW ECONOMY PROJECT BEFORE THE
NYS SENATE COMMITTEES ON BANKS AND CONSUMER PROTECTION
AND
THE ASSEMBLY COMMITTEES ON BANKS, SMALL BUSINESS, AND
CONSUMER AFFAIRS & PROTECTION

Public Hearing on Online Lending Practices

May 22, 2017

Thank you for the opportunity to testify today. My name is Raúl Carrillo and I represent New Economy Project, based in New York City.

Our organization was founded in 1995 (as NEDAP), with the dual mission of fighting discriminatory economic practices that perpetuate inequality, poverty, and segregation, and working with community groups to promote community-led economic development initiatives. Since that time, New Economy Project has been at the forefront of efforts in New York to expose and combat predatory lending, debt collection, and foreclosure abuses; to end the discriminatory use of credit information to block qualified New Yorkers from jobs; to protect immigrants’ rights within the financial system; and to keep payday lending out of our state.

Our staff includes a roster of nationally-recognized experts in the consumer financial justice and economic development fields, and we have deep expertise on bank and insurance redlining, fair lending, and community development finance. We have since 2005 operated a free legal assistance hotline for low-income New Yorkers aggrieved by discriminatory and abusive financial practices. Through our hotline and related impact litigation, New Economy Project has helped hundreds of thousands of low-income New Yorkers and New Yorkers of color, particularly seniors, immigrants, and women, to vindicate their rights and obtain significant redress from banks, debt collectors, and other financial services entities.

We feel compelled to testify today, because we are extremely concerned about new attempts to undermine our state’s strong consumer protection laws — this time by online lenders that seek to circumvent or diminish our state’s usury laws, firmly on New York’s books since colonial days. We see a clear need for increased consumer protections in the online lending space, and to counter misrepresentations made by industry members as they press legislators for less regulatory oversight and enforcement. We approach the hearing topic today, in terms of the implications of online lending for economic and racial justice, and for equitable community development.

We present three main points today, starting with one crucial point: the need to preserve New York State’s longstanding civil and criminal usury laws.

• Our longstanding usury law is an absolutely critical bulwark against predatory lending, and the Legislature must ensure that this vital consumer protection remains intact. New York is one of 15 states in the U.S. with usury laws that serve to ban predatory payday and other high-cost lending. State usury laws like New York’s are indeed considered the best line of defense against predatory consumer lending.

The way our country’s banking laws have evolved, nationally chartered banks are largely preempted — or exempt — from our state consumer protection laws. And banks chartered in other states are generally able to “export” their state’s usury laws into other states, making it especially attractive for banks to secure charters in Delaware, for example, which has no usury limit. Over the years, payday lenders and others have therefore partnered with out-of-state and nationally-chartered banks, in order to gouge New Yorkers with high-cost loans that exceed our state’s usury laws. Fortunately, New York, as well as federal banking regulators, the Consumer Financial Protection Bureau, and the courts, have all cracked down on these sham rent-a-bank arrangements. Allowing online lenders to use out-of-state banks or federally-chartered ones to gouge New Yorkers would not only constitute dangerous public policy, but would also represent a reversal of strong legal precedent and regulatory action.

Our consumer protection laws are not only strong, but they are also meaningfully enforced. Through rigorous oversight and enforcement, New York has emerged as a national leader in consumer protection, particularly with respect to high-cost payday lending and debt collection. New York achieved this distinction by pursuing a series of state-level enforcement actions against illegal payday lenders and debt collectors trying to collect on illegal payday loans, cease and desist orders issued to payment processors, and strongly-worded guidance to banks. As a result, payday lending is all but non-existent in our state, and our legal assistance hotline no longer receives calls from New Yorkers who took out illegal payday loans. Allowing online lenders to get around our usury laws would undo these major efforts — and roll back our vital protections.

• New York should strengthen, not weaken, consumer protections when it comes to online lending. Online lenders — including Lending Club, LendUp, and others — have been subject to a long list of state and federal enforcement actions, settlement agreements, and investigations. The industry’s rhetoric of serving borrowers simply does not match the reality, in which securitization of online loans and other incentives to achieve high volume-lending have led to deceptive practices, misrepresentations, and regulatory violations — to the detriment of borrowers and investors alike.

The business model for the online marketplace lending industry, for example, is disturbingly reminiscent of the subprime mortgage market, in which the name of the game is pumping out a high volume of loans so they can be bundled and securitized on Wall Street. Securitizing online marketplace loans is a multi-billion dollar business, with 70% of these loans now reportedly funded through securitization, totaling more than $2.4 billion dollars in just the 4th quarter of 2016. In this case, things could get especially ugly for borrowers, as it is difficult to get out of an online marketplace loan.

We understand that many online marketplace loans are targeted at “small businesses.” However, many of these loans are tantamount to personal loans, and should be regulated as such. Loans to mom-and-pop, family, and immigrant-owned small businesses especially resemble consumer loans, in which owners’ personal credit and other information is used to make the loan.

There is a growing chorus of voices – including that of the United States Treasury – calling for greater protections for online small business borrowers and New York has an opportunity to ensure that New Yorkers are not harmed by this fast-growing sector. Indeed in its 2016 report on online marketplace lending, the Treasury Department’s number one recommendation was to “support more robust small business protections and effective oversight,” as “strong evidence indicates that small business loans under $100,000 share common characteristics with consumer loans yet do not enjoy the same consumer protections.”

Meanwhile, New York is considering a bill, S.5771/A.6511, sponsored by several members of the committees convening this hearing today, that would permit an out-of-state marketplace lender, Insikt, to launch a pilot program similar to one it spearheads in California, which permits predatory payday lending. In fact, loans under the proposed pilot program would carry annual percentage rates nearly two to three times that permitted in New York. Simply put, the proposed pilot would blast a hole in New York’s usury law — and we urge all committee members to oppose this bill.

We are submitting for the record our organization’s memorandum in opposition to this bill, and add to the hearing record a letter from three highly-regarded fair lending and consumer justice groups in California, warning New York not to go down this road. Among other points they raise, the Insikt pilot was implemented in California as a less expensive alternative to predatory payday lending. But payday lending has always been illegal in New York, and the last thing we need is a less predatory “alternative.” Also for the record, I am adding a letter from groups in Florida that opposed a similar pilot program effort in their state. The Florida Legislature recognized that the pilot was unwarranted and did not pass the bill; and consumer advocacy, faith-based, and civil rights groups have gone on record opposing the effort.

Finally, we would be remiss if we did not mention the related dangers of New York’s so-called “check-cashers’ bill.” That ongoing and misguided legislation was recently split into two separate bills, including one that would permit New York check-cashers to engage in “conduit services.” Although the bill, S. 6121 /A. 7907, allegedly would not permit check cashers to make loans, as previous bill versions proposed, the bill language leaves the door wide open to all sorts of predatory lending and brokering abuses. Again, New York cannot simply assert that federally-chartered and out-of-state banks are subject to our state’s “prevailing interest rates.” This does not work as a matter of law.

• The Legislature should support the creation and expansion of community development financial institutions (CDFIs) throughout the state. New York has perhaps the most robust network of CDFIs in the country, responsible lending institutions that know how to meet the financial services and credit needs of consumers, small businesses, and communities.

In fiscal year 2015, 74 CDFIs served every county in New York State with more than $2.6 billion in financing to 60,000 customers, including individuals, small businesses, affordable housing developers, primary care and non-profit community facilities.

In its 2016 Small Business Credit Survey, the Federal Reserve Bank of New York reported that small business borrowers have the least satisfaction — and greatest dissatisfaction — with online lenders. By contrast, small business borrowers have the most satisfaction and least disatisfaction with CDFIs, along with small banks and credit unions.

New York State has invested in an online portal for small businesses in New York State, which links them to CDFIs, based on their location. In 2007, New York created a state CDFI Fund to help local CDFIs secure federal CDFI funding and leverage resources from other public and private sources. That’s because the Legislature understood that CDFIs typically leverage every dollar in funding between 12 to 20 times over — all to the benefit of low income New Yorkers and communities, and to community development more broadly. But the state has yet to put public dollars into the very fund it created for these vital purposes.

If New York is serious about ensuring access to fair and responsible credit for New Yorkers and for small businesses, we respectfully urge the Committee Chairs and Members here today and the entire New York State Legislature to put its energy into supporting community development financial institutions — rather than continuing to pursue unsound policies that would compromise our consumer protections and open the floodgates to predatory lending in New York.