Ban Foreign Payday Loans

Existing law

Banking corporations that are outside of New York should be prohibited from making payday loans because the annual percentage rates on these loans are astronomical, many lenders use shady tactics to collect payments, and they also target those with low income. According to recent studies, the predatory lending industry has been rapidly growing across the country. This includes payday loan companies which offer small sum, short-term, high-rate, unsecured personal loans. These loans go by many names, including "payday loans," "cash advance loans," "postdated check loans" or "deferred deposits." Payday lenders advance cash loans to consumers who agree to repay the amount, plus a finance fee, with a post-dated check. The lender agrees to hold the check until the customer's next payday, up to 30 days. At that time, the borrower may redeem the check with cash, allow the lender to deposit the check or roll over the loan by paying another fee.

For example, an individual borrows $200 until his/her next paycheck. That individual writes a postdated check to a payday lender for $230 (15% of $200 = $30 lender's fee + $200 loan amount = $230) and get $200 cash in return. The $30 fee for the loan calculates to an Annual Percentage Rate (APR) of 391%. The payday lender may also charge you a one-time fee of $10 to setup an account. If the loan cannot be repaid in the agreed-upon 14 days, the individual may elect to extend the loan for another two weeks by paying an additional $30. A rollover of the loan will then have a $60 lender's fee for a one-month loan of $200. If the loan is extended for a total of six months, a person ends up paying $360 in fees, without having paid back any of the principal (the original $200).

On average, consumers are now paying 400 percent or more for Payday loans. Payday lenders can also resort to bullying tactics, such as threatening criminal prosecution for writing a bad check, leaving borrowers with few options but to rollover the debt or default on other debts. Moreover, payday lenders target the working poor. For those living paycheck to paycheck, with little or no ability to secure credit from banks for loans large or small, payday loans may appear the only alternative for quick cash, irrespective of the interest rate. Therefore, lenders are able to take advantage of low-income borrowers.

A study conducted by The Woodstock Institute found that 19 percent of payday loan customers make less than $15,000 a year, and another 38 percent make between $15,000 and $25,000. The Woodstock Institute's report also noted that debt is steadily increasing while personal savings are decreasing for low-income households.

This legislation ensures that no foreign banking corporation shall make any payday loans, either directly or indirectly. It preserves the ability of the state to protect consumers against abusive payday lending practices. In New York, lenders would be in violation of § 190.40 of the New York State Penal Code if the loan advanced results in an annual interest rate in excess of 25 percent. Since there are strict restrictions placed on payday lenders in New York State, payday lenders ally with out-of-state banking corporations to get around state laws. This bill would eliminate this loop hole and provide consumers with affordable interest rates on loans.

Justification

This bill would protect consumers against abusive payday lending practices that have become a serious issue given the economic climate. The state should do everything it can to ensure New Yorkers aren't taken advantage of by unscrupulous actors.

Legislative history

2015-16: S.4458/A.4836: Referred to Banks. 2013-14: S.4036

Fiscal implications

None to the State.

Effective date

This bill shall take effect on the ninetieth day after it shall have become a law.