Enacts the "short-term financial services loan act"

Summary of provisions

Section 1: Creates the Short-Term Financial Services Loan Act.

Sections 2 and 3: Amends Banking Law section 18-a(4) and (5) to establish license fees for check cashers that offer small loans under this act.

Section 4: Amends Banking Law section 340 to create an exemption to the Licensed Lender Law to allow licensed check cashers to make financial services loans.

Section 5: Amends Banking Law section 373(1) to create an exception to the provisions which currently prohibit licensed check cashers from making loans: language is added to enable licensed check cashers to make small financial services loans as authorized by the Banking Law and subject to the regulatory supervision of the Banking Department and the consumer protections provided in this bill.

Section 6: Adds new sections 373-a through 373-h to the Banking Law to authorize licensed check cashers to offer small denomination loans to consumers under certain circumstances. Prohibits the advertising or making of a short-term loan via the internet by a person who is not licensed in accordance with this law. Limits the amount of such loans to a minimum of 5300 and a maximum of either 52,000 or 25% of a borrower's gross monthly income, whichever is less. Specifies the maximum level of interest and fees that may be charged for such loans. Requirements are placed on licensees to lend money only to qualified borrowers based on income and their ability to repay such loans. The bill also provides that no licensee shall cause a borrower to be obligated on more than one such financial services loan at a time. A real-time loan eligibility registry, which is accessible by the Superintendent of Financial Services and by other lenders, is established to track borrowing behavior and verify whether there is an outstanding financial services loan for a particular person. The bill minimizes the types of actions that a lender may take against a borrower for non-payment of a loan, as well as the types of fees that may be charged in such situations. The bill also creates a "financial education fund" that will be funded by licensed check cashers which offer such financial service loans.

Justification

This bill addresses the unfulfilled need of New Yorkers for an affordable, small-dollar, short-term credit product, to be provided by a strictly regulated lender.

Many New Yorkers may find themselves in need of a small, short-term loan to address their . financial situation, but they have few options

available to them. Affordable small dollar, short-term cash advances are unavailable for many people in. this State. The reasons for the lack of such products include the absence of traditional lenders willing to provide small amounts of credit. Given the fixed costs involved in making and processing a loan, the cost of providing small amounts of credit can be proportionally high.

As a result, persons with low or spotty credit ratings, who may need credit the most, are unable to obtain smaller loans, and instead find themselves subject to alternatives like high interest credit cards and overdraft protection products, Further, many New Yorkers may seek out unregulated payday loans being offered over the internet, or by phone, from out-of-state companies.

Notwithstanding, the absence of appropriate small-dollar, short-term credit products, there is a demonstrated need for such products from regulated sources at affordable rates. Consumer demand and the incidence of high-cost borrowing in New York have been documented by consumer research studies. Accordingly, New Yorkers are satisfying their need for small short tell"), loans through high cost financial sources such as credit cards, overdraft protection, deferred/late payments, and unregulated "payday" loans.

An estimated three million New Yorkers incurred overdraft protection fees and nearly six million incurred late fees for paying their bills or credit card balances late. Furthermore, approximately one million New Yorkers obtain an estimated total of eight million payday loans each year from unlicensed and unregulated out-of-state lenders. These loans have an aggregate estimated value of between $4 to $5 billion. These lenders are charging New Yorkers exorbitant fees and interest rates to provide a cash advance until their next payday check is received. Further, such loans are being made with few or no consumer protections for the borrower.

In contrast, the regulated products created by this bill are not payday loans. Payday loans typically come due every two weeks, whereas this bill authorizes a longer term loan for at least between 90 and 180 days and provides for installment payments. The extension of small dollar, short-term credit by out-of-state companies at extremely high costs is draining New York's economy of capital, removing tax revenue from the State, and causing the loss of jobs to other states. This bill can help to satisfy the financial needs of its citizens in these times of .-eat financial stress and do so in a way that enhances consumer protections for some of our most vulnerable citizens.

New York check cashers are in the singular business of offering consumer financial services. Existing regulatory oversight, coupled with an extensive network of convenient locations, make the licensed check casher industry well-suited to offer a viable small dollar credit alternative to New Yorkers. These small dollar loans would be authorized in New York subject to strict supervision by the NYS Department of Financial Services. This bill also creates a financial education fund that will be funded entirely by licensed check cashers offering financial services loans. The need for financial education in the State of New York is acute, and this new fund will assist in addressing that need. The fund will be administered by the

Superintendent of Financial Services, in consultation with the check cashing industry.

Legislative history

See S.3841-A of 2011-12; see S.7043 of 2010

Fiscal implications

None

Effective date

180 days after it shall have become law