By Errol Louis
With little fanfare or warning, the Cuomo administration has dealt a crippling blow to the payday lending industry, an unsavory collection of financial bottom-dwellers who profit by saddling the desperate and the unwary with loans that frequently exceed 700% — and in some cases, even top 1,000% in annual interest charges.
The crackdown couldn’t have come at a better time. The last thing New Yorkers struggling to emerge from the long economic recession need is a flock of financial vultures picking at them.
Under New York’s usury laws, it’s illegal to charge more than 25% interest. But for years, out-of-state payday lenders have broken the law with impunity by having no office here, but having New Yorkers apply online or by phone.
In a typical transaction, a borrower might take a $200 advance on his or her next paycheck, and owe a repayment of $260 two weeks later — an effective annual interest rate of 782%. On average, borrowers end up rolling over payday loans for five months, racking up interest charges that exceed the amount of the original loan.
Those days are over in New York, according to a toughly worded letter sent to 35 online payday lenders by state Financial Services Superintendent Benjamin Lawsky. “Effective immediately, your company, its subsidiaries, affiliates, agents, successors and assigns are directed to CEASE & DESIST offering and originating illegal payday loans in New York,” he wrote Tuesday.
For good measure, Lawsky sent a letter to all New York debt collection agencies, informing them that payday loans are “void and unenforceable,” and that his agency would crack down on any firm that tries to collect on them.
That’s music to the ears of consumer advocates, who have been waging a nationwide battle for more than a decade to contain, if not eliminate, payday lenders.
Across America, an estimated 12 million people borrow from them every year, and more than a third of the borrowers were so desperate that they would have taken the money on almost any terms, according to a recent survey by the Pew Charitable Trusts.
The damage done by the industry is widespread. Compared with other Americans, payday borrowers are more likely to earn less than $40,000 a year, and most use the money to pay for recurring basic expenses like utilities, food or rent — the kind of necessities it’s dangerous to borrow to pay for, let alone with 700% interest.
But the problems aren’t confined to poor neighborhoods. For years, payday lenders targeted members of the military, many of them young men and women surviving on meager pay.
Under Pentagon rules, soldiers who are deeply in debt lose their security clearance and can’t be deployed overseas — something that had been happening to more than 5,000 soldiers a year, leading Congress to pass a 2007 law that limits the ability of payday lenders to do business with active-duty personnel.
But the industry has fought back. As a new report by ProPublica shows, several states that passed bans on payday loans are now seeing new superhigh-cost loans just different enough to circumvent the prohibitions. One popular loophole involves a “credit repair” loan with sky-high fees that technically aren’t interest. And to avoid regulation, some predators are shifting operations to foreign places like Grenada or Isle of Man.
The Cuomo administration has done its part to keep the wolves at bay; consumers must do the rest. The Move Your Money project (moveyourmoneyproject.org) has a helpful guide to finding credit unions and community banks that extend credit on reasonable terms. And the New Economy Project (nedap.org) offers tons of educational material on how and why people should avoid the modern-day loansharks.
Louis is political anchor at NY1 News and host of “Road to City Hall.”