New York to Payday Lenders: "Pay Up"

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Payday lenders have a bad reputation, and the news coming out of New York this week isn’t going to change that anytime soon. This after two payday lenders and a Delaware bank were forced to pay more than $5 million to 14,000 consumers who were victimized – usually through paying higher interest rates than legally allowed. How did New York hold these payday lenders accountable?

The story begins with three companies: Telecash, Cashnet and County Bank of Rehobeth Beach, Delaware. According to the New York State Attorney General’s office, all of the companies were charging onerous interest rates for payday loans. Some loans came with interest rates of 500% or more. Backed by County Bank, the two payday companies set up shop mainly in the New York boroughs of Brooklyn and the Bronx and preyed on low-income New Yorkers who needed short-term loans – usually between $100 and $500 – which the borrower has to repay within a short period of time, but at a high interest rate.

Payday loans are problematic for many borrowers, but especially for low-income consumers who are often forced to extend – the industry term is "rollover" – the repayment timetable by paying exorbitant interest. According to a U.S. Congressional panel in Washington that’s studying the payday loan issue, borrowers are charged about $15 for every $100 borrowed for a two-week period. The panel says that translates into an interest rate of 390% annually. The study also says that payday loan operators draw many “repeat” borrowers, with the typical customer borrowing funds seven times a year.

A separate study by Paige Marta Skiba, of the Vanderbilt University Law School, and Jeremy Tobacman, of the Wharton School at the University of Pennsylvania, says that an estimated 10 million American households borrow on payday loans each year.

Apparently, consumer advocates in New York had seen enough. According to the New York State Attorney General’s office, payday loan operators Telecash and Cashnet, through an agreement with County Bank, disguised their payday loans as being made by County Bank. But New York claimed that federal banking laws permit state or nationally chartered banks to make loans throughout the United States at the interest rates permitted under the bank’s home state – that’s no more than 16% in New York. But County Bank was based out of Delaware, which, unlike New York, has no cap on the amount of interest that can be charged on a loan.

In other words, Delaware allows high interest payday loans – but New York doesn’t.

Payday loan industry officials don’t see their loans as a problem, with a common refrain coming from the industry that payday loans were never meant to be long-term loans, the bulk of which generate those gargantuan interest rates. They also point out that many states have implemented stiff regulations on payday loan rollover provisions – including New York.

But what tripped up County was operating as a bank (with Cashnet and Telecash acting as “fronts”) in New York, but under Delaware-type rules. Thus, the state of New York levied fines and penalties. Under the terms of the case, anyone who borrowed cash from either payday loan operator will be repaid based on the amount of interest they paid on their loans. New York estimates repayments anywhere between $10 and $4,500).

If you think you’ve been had by Cashnet or Telecash, and reside in the state of New York, contact the Attorney General's Help Line at 1-800-771-7755.

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