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NY Times: Gouging the Poor in New York

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New York Times editorial

Gov. Andrew Cuomo of New York has warned debt collectors that they could face legal sanctions if they try to collect predatory loans that violate the state’s usury law, which prohibits loans with interest rates above 25 percent. The governor needs to take an equally forceful stand against pending bills that would encourage predatory lending by allowing check-cashing stores to enter the lending business and exempting them from the usury law.

Payday lenders prosper by turning what are supposed to be two-week transactions into long-term debt, which can carry rates of 500 percent or more if borrowers take months to pay off. In 1976, New York made it a felony to make these kinds of loans.

The sponsors of the bills on check-cashing stores have tried to make them seem innocuous. But an analysis by the Neighborhood Economic Development Advocacy Project finds that even the most affordable loan offered under the Assembly bill would entail an interest rate of nearly 50 percent, if proposed fees are taken into account.

Supporters of the exemption portray it as a boon to poor communities that lack access to banking and credit. Poor neighborhoods, however, already pay too much for financial services. Beyond that, if New York gives check cashers an exemption to issue loans that exceed the current 25 percent limit, lobbyists will eventually seek similar exemptions for other financial institutions.

Public interest groups have spoken out against the bills. They include the Navy-Marine Corps Relief Society, which says it extended $43 million in assistance last year to more than 61,000 servicemen and women, many of whom had been trapped with high-interest loans they could not afford. The check-cashing-store exemption, it says, “would be harmful to active and retired Sailors, Marines, and their families residing in New York and struggling to make ends meet in this difficult economy.”

The answer to the problem is not to gouge these communities but to bring legitimate financial services to neighborhoods that need them.