Legalized Loan-Sharking: Is It Coming to New York?

Payday lending has been denounced as "a scourge on vulnerable citizens" and condemned as "modern day usury." So why do some state legislators want to introduce these predatory financial products to NY?
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Payday lending has been denounced as "a scourge on vulnerable citizens" and condemned as "modern day usury." Across the country, consumer advocates are fighting to rein in the high-cost, short-term loans that trap low- and moderate-income borrowers in thousands of dollars of high-interest debt. So why do some state legislators want to introduce these predatory financial products to New York?

New York State usury laws limit the interest charged on small loans, ensuring that borrowers will not be harmed by exorbitant interest rates on debt they have little ability to repay. Our longstanding safeguards in this area are a model for other states. Yet last week, legislation to roll back these consumer protections passed the Senate Banks Committee.

S3841, sponsored by State Senator Hugh T. Farley of Schenectady, claims to "provide consumers with additional options and choices" by permitting check-cashing businesses to make small loans. But the "option" to purchase a toxic financial product is no more desirable for consumers than the "option" to buy tainted meat at the grocery store: both are choices that New Yorkers would be better off without.

Research from the Center for Responsible Lending finds that most payday borrowers quickly take out another loan as soon as their last is paid off. As the researchers explain:

Payday lenders generate loan volume by making a payday loan due in full on payday and charging a sizeable fee -- now nearly $60 for an average $350 loan. This virtually guarantees that low-income customers will experience a shortfall before their next paycheck and need to come right back in the store to take a new loan. This churning accounts for 76 percent of total loan volume, and for $20 billion of the industry's $27 billion in annual loan originations.

Getting desperate borrowers on the hook for more loans, more interest payments and more fees in a cycle of long-term debt is fundamental to the business of payday lending.

New York check-cashing companies, eager to take advantage of the profits that lucrative payday lending business would offer, insist that the New York bill is not payday lending per se because it authorizes slightly longer terms for the loans and allows borrowers to make installment payments. But the business model is the same. Once the door is open to check-cashing companies to offer high-interest loans, it's a slippery slope for other businesses, from banks to out-of-state loan companies, successfully lobbying to peddle them as well.

What's worse, the New York bill has hidden traps that actually require that the Banking Department guarantee short-term lenders a profit when it considers how to set maximum fees and interest rates. At the same time, the Banking Department would be required to set maximum rates and fees for the loans based on the extraordinary triple-digit rates that payday lenders charge in other states.

Lobbyists for the bill are right on one count: many New Yorkers may not have the ideal access to small dollar loans. But this hardly justifies authorizing the sale of an inherently harmful product within New York: instead, as Melissa Marquez of the Genesee Co-op Federal Credit Union in Rochester argues, we should work with responsible lenders like credit unions and community development financial institutions to promote awareness of their existing small dollar loans and, if needed, work with them to develop new products. S3841 and its Assembly companion bill take New York in the wrong direction.

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