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memorandum in opposition

Empire Justice Memo of Opposition: New Yorkers Would Be Harmed If Check Cashers Became Lenders

A.1113-A (Heastie)/S.3999-A (Farley)

This bill would enact the "short-term financial services loan act" and authorize licensed cashers of checks to provide short-term loans under certain circumstances.
Empire Justice Center strongly opposes A.1113-A/S.3999-A, which would exempt New York check cashers from the state’s usury protections and permit them to make high cost, unsafe, small dollar loans.  We believe the bill would create an unlevel playing field by allowing check cashers to make loans that are currently prohibited from being made by mainstream, regulated banks and credit unions.  Passage of the bill would also risk opening the floodgates to a host of abusive and usurious products, such as payday loans, that prey on low income and struggling consumers by charging exceptionally high interest rates.

The bill seeks to hide the fact that the loans would clearly violate New York’s usury law.  The bill, as recently amended, tries to mask the true cost of these short-term loans by misleadingly separating the fees that check cashers would be permitted to charge from the allowable interest.  The definition of usury under New York’s usury law, however, clearly includes both interest and fees.  Even if check cashers made short term loans with interest rates at 25%, the actual annual percentage rate of the loans, given the list of fees set forth in the bill, would be as high as 204% – more than eight times the state’s usury limit.  The amended bill continues to include a provision that would categorically exempt check cashers from the state usury law when making these loans. 

The bill would harm, not help, individuals and families.  Like payday loans, the loans contemplated would be short-term, carry triple-digit interest rates, and be made without regard to people's ability to repay.  There would be no underwriting of the loans to consider a person's other debts and obligations – basic principles of responsible lending.  Despite industry claims of offering a quick financial fix, these loans are designed to ensnare borrowers in a cycle of long term, often insurmountable debt.  The cycle also leads to ruined credit, in turn impeding a person's ability to secure housing and jobs, and other economic opportunity.

High cost, short term loans harm neighborhoods and communities, and undermine economic development.  In states where it is legal, payday lending has stripped billions of dollars in wealth from low and moderate income communities and from communities of color.  Low income New Yorkers driven into debt by these loans will have even less discretionary income to spend locally.

A.1113-A/S.3999-A would directly undermine existing efforts by New York regulators to crack down on abusive, short term lending.  Some bill proponents claim that A.1113-A/S.3999-A is necessary because payday lenders are soliciting New Yorkers through the internet.  This argument makes no sense as a matter of public policy and is clearly a red herring.  According to Pew Charitable Trusts: “In states with strong legal protections, the result is a large net decrease in payday loan usage; borrowers are not driven to seek payday loans online or from other sources.”

In addition, the NYS Department of Financial Services issued a strong letter in February 2013 to New York debt collectors, reminding them that it is illegal to collect on payday loans made to people in New York, since payday lending is itself illegal.  Recent press reports underscore the illegality of Internet payday loans made to people in New York, and the fact that state regulators are investigating and mounting enforcement actions to crack down on these illegal lending practices.

The fact that many New Yorkers are struggling financially, having trouble getting from paycheck to paycheck, does not justify the legalization of exploitative lending practices.  Advocates around the country increasingly recognize that the answer to people’s income shortfalls should not be facilitating unfair and abusive lending, and that sound policymaking in this area should focus instead on promoting a living wage, savings and responsible lending.

The New York legislature should preserve the integrity of our state’s strong usury law.  This legislation would do tremendous harm to low and moderate income communities and communities of color by eviscerating consumer protections and opening the door to a new wave of predatory lending in New York.

Instead of rolling back critical consumer protections, the NYS legislature should affirmatively promote community development financial institutions, and other responsible lenders, that are in the business of meeting community credit needs in a safe and non-discriminatory manner.

See also memo in opposition by New Yorkers for Responsible Lending.

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