What is Payday Lending?

• Payday loans are short-term cash loans based on personal checks held for future deposit or electronic access to the borrower's bank account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive cash. Lenders hold checks until the next payday when payment is due. Borrowers can redeem the check for cash, allow the check to be deposited, or pay the finance charge to roll the loan over for another pay period.

Why are Payday Loans like Loan Sharking?

• Payday loans range from $100 to $500, have average terms of about 14 days, cost 470% annual interest rate for a $100 two-week loan. The finance charge ranges from $15 to $30 to borrow $100 for two weeks or 390% to 780% APR. Shorter loans have even higher APRs.

Who makes Payday Loans?

• Payday loans are made by storefront lenders, check cashers, and pawn shops and are marketed via toll-free telephone numbers and over the Internet. Up to 24,000 outlets make 95 to 100 million loans a year worth $25 to $27 billion, and generate over $4 billion in fees.

Is Payday Lending Legal?

Payday Lending Is Illegal in New York

• States traditionally regulate the small loan market and license lenders who are allowed to charge relatively high rates to make small loans available to consumers without perfect credit standing. New York's civil usury cap is 16 percent interest a year (New York General Obligations Law § 5-501 and New York Banking Law § 14-a, subd. 2). The criminal usury cap is 25 percent annual interest (New York Penal Law § 190.40). Check cashers are prohibited from cashing checks with deferred dates in New York.

• New York is one of fifteen states with a usury law or small loan rate caps that apply to loans of up to $500, the typical payday loan size. See attached chart for list of states that prohibit the high cost and short terms of payday loans.

• Two states set no usury limits for licensed lenders. Payday lenders operate in those states with no limits on their finance charges or loan terms.

• Thirty-three states and the District of Columbia have enacted safe harbor laws to exempt payday lending from small loan and/or usury laws and to authorize single payment loans based on check-holding. Restrictions on payday lending vary widely among these states. Authorized maximum loans range from $255 to $1,000. There is no minimum term for loans in 25 states, and the highest maximum term is six months in Ohio. The vast majority of payday loans are for a few days up to two-weeks in length.

Finance charges permitted for payday loans in states that cap fees range from 10% of the loan plus up to $5 administrative fee in Florida to 25% of the loan in Montana. Eight states set no limit on payday loan finance charges.

If Payday Lending is illegal in NY, then why are payday lenders advertising and marketing payday loans to New Yorkers, charging rates over twenty times the legal maximum for small loans?

A few loan servicing companies are partnering with banks located in deregulated states, such as Delaware, and are marketing loans via toll free phone numbers and delivering loans via electronic funds transfer. These companies claim that the loan servicer is just brokering loans for the bank that is just exporting its home state interest rates to New York. This is what we call "rent-a-bank" payday lending, where the store-front is really the lender but partners with a bank in hopes of using the bank's authority to preempt state laws.

Some lenders operate in states without legal authorization by claiming to broker payday loans for banks located in permissive states. Rent-a-bank payday lending has led to regulatory action by the Comptroller of the Currency and the Office of Thrift Supervision. Currently only FDIC-insured state-chartered banks are partnering with payday lenders to aid their evasion of state usury and consumer protection laws.

There are about a half-dozen state chartered FDIC banks partnering with storefront payday lenders. Two of them are overseen by the New York FDIC office: County Bank of Rehoboth Beach, DE and First Bank of Delaware. We have yet to see if the FDIC will examine these banks for safety and soundness compliance or apply its payday loan guidelines as firmly as other regulators and close this loophole to state usury and small loan laws.

Payday lenders who depend on bank partners to evade state usury and small loan laws are hopefully on borrowed time, which explains the strong push by the industry to win legal safe harbor from state legislatures. New York is the largest and most populous state in the country where payday lending is not legal. The goal of payday lenders is to enact a law in every state to authorize check holding for quick cash, triple digit interest rates disguised as affordable finance charge percentages, continuous loan flipping and the right to treat borrowers as bad check writers if they cannot repay on the next payday.

Why is Payday Lending bad news for Consumers?

• Payday loans are predatory lending and are extremely expensive, trap borrowers in perpetual debt, and lead to coercive collection tactics. Consumers on average have 10 to 13 loans per year at a single lender. The business model is to encourage repeat borrowing.

• Every unpaid loan involves a check that won't clear the bank. Failure to repay leads to bounced check fees from both the lender and the consumer's bank, negative credit rating on specialized databases, possible loss of a bank account, and difficulty in opening a new bank account if the borrower has a record of "bouncing" checks.

• Some lenders threaten criminal penalties for failing to make good on checks given as security for a loan. Others threaten court martial if military personnel fail to cover payday loan checks. In some states lenders can sue for multiple damages under civil check laws.