Payday loans–short-term, high-interest cash advances that often target low-income communities–are illegal in New York state. A 1976 law made it a felony to charge borrowers an interest rate above 25 percent. Because payday loans operate on quick lending cycles–usually two weeks–the annual interest rate climbs way above 100 percent, sometimes as high as 600 percent.
The state has been going after these lenders hard recently, with cease and desist letters and lawsuits. And on Monday Attorney General Eric Schneiderman announced that he had reached a settlement with five of them.
The five companies, all based in upstate New York, will pay a combined $$29,605.98 in fines, plus $279,605.98 in restitution.
If this song sounds familiar, it’s because it’s become the anthem of financial regulation: secure low settlement, proclaim victory.
Buffalo Business-First reported that the lion’s share of that settlement–more than two thirds–falls on one company. RJA Capital Inc. took on $11,297.06 in penalties and $218,702.94 in restitution.
Which means the other four split the little left of the pie: Erie Mitigation Group LLC pays $7,121.50 in fines and $37,878.50 in restitution; V&R Recovery Inc. pays $3,188 in fines and $14,812 in restitution; Westwood Asset Management LLC pays $3,000 in fines and $8,212.54 in restitution.
Northern Resolution Group LLP pays $5,000 in fines, and instead of paying restitution, it must reverse 8,550 negative credit reports against delinquent borrowers. Also–and perhaps this should go without saying–the company “is prohibited from collecting on $3,200,000 in payday loans taken out by New Yorkers,” the A.G.’s office noted in a statement, adding that “All of the companies will be prohibited from collecting on payday loans from New Yorkers in the future.”
Payday loan companies have long argued that they simply fill a vacuum left by banks and the rest of the mainstream lending world. They note the low-income folks don’t have many places to turn when the rent’s due and the paycheck’s still days away. And, in many cases, they’re right. Payday loans do bail people out of urgent situations.
But they also, by design, pull other people into even worse situations. The payday loan business model relies on borrowers rolling over their loan because can’t make the payment by the due date. The already-high interest accumulates and, within a couple of months (just three or four roll-overs) the borrower owes in interest as much as he took out in the first place.
A September study by the Responsible Center for Lending found that 76 percent of payday loan volume comes from borrowers “taking out a subsequent loan within two weeks of the previous loan.”
This weeks settlement is part of the state’s greater effort in cracking down on predatory loans. Schneiderman has filed suit against other predatory lenders, including South Dakota-based Western Sky Financial, which offers payday loans through the Internet.
In August, Governor Andrew Cuomo sent cease and desist letters to 35 online payday loan companies. The state also contacted 117 banks asking for help dealing with payday lenders accessing borrowers’ accounts in order to make automatic withdrawals:
We are requesting that you work with us to create a new set of model safeguards and procedures to choke off ACH access to the 35 illegal lenders DFS’s investigation has identified to date, as well as the broader payday lending industry. Doing so is not only in the interest of your customers who will be better protected from these predatory loans. It is also in your bank’s long-term interest to take appropriate action to help ensure that it is not serving as a pipeline for illegal conduct.