Testimony of Sabrica Barnett, NYPIRG Consumer Advocate
Before the Committee on Consumer Affairs, New York City Council
September 15, 2003
Good Afternoon. My name is Sabrica Barnett and I am a Consumer Advocate
for the New York Public Interest Research Group (NYPIRG), a statewide
not-for-profit research and advocacy organization. I would like to begin
by thanking the Committee on Consumer Affairs for giving me the opportunity
to testify on payday lending.
I would like to start by first pointing out that my testimony today
is on behalf of NYPIRG and the Consumer Federation of America (CFA)
and that Jean Ann Fox of CFA assisted in the preparation of my testimony.
Ms. Fox and CFA have a long history of research and advocacy on this
issue and, in fact, are mentioned and quoted in the text of some of
the intros and resolutions we are here to discuss today. NYPIRG has
participated in the CFA payday lending surveys and in other aspects
of the campaign to eliminate payday lending.
NYPIRG and CFA welcome the interest and concern of the New York City
Council concerning usurious payday lending. New York law caps interest
rates at 25% annual interest rates for small loans. Check cashers are
prohibited by law from making loans based on holding consumer's personal
checks for future deposit at a steep fee.
Yet, payday lending is being marketed to New York consumers. According
to a 2001 NYPIRG and CFA survey of payday lenders across the country,
a handful of loan servicing companies partner with a Delaware state-chartered
bank to market loans at triple digit rates to consumers in New York.
These loans are advertised to New Yorkers and arranged through telephone,
fax and electronic funds transfer. New York consumers pay up to $30
to borrow $100 with the total due on the borrower's next payday. This
translates to 780% annual interest rates for a two-week loan to families
having trouble making ends meet until payday.
Because payday lenders demand the right to electronically withdraw
the entire loan and finance charge from the borrower's bank account
within days of lending the money, consumers end up on a treadmill of
debt, paying the finance charge to roll over loans to the next payday
to keep their checks from bouncing. After five rollovers, a borrower
will have repaid more than she borrowed, but still owe the original
amount. (5x$30=$150 and still owe original $130 for a $100 loan)
We agree with the Council that payday lending is an outrageous breach
of New York consumer protections and that something must be done to
stop local loan arrangers from partnering with out-of-state banks to
evade New York law at the expensive of cash-strapped workers.
However, solutions contained in Intro 461, Intro 462 and Resolution
880 do not go far enough to protect hard-working, low-income New Yorkers
who become trapped by these unscrupulous lenders into a vicious circle
of burdensome high-interest loans.
Intro 461 requires lenders to provide clear cost disclosure information
to potential borrowers and to periodically provide demographic information
on their customers to the City. Intro 462 requires lenders to provide
clear and conspicuous disclosure in their advertisements regarding material
information, such as interest rates and other charges, so that consumers
understand the true cost of the loans. Resolution 880 calls upon the
MTA to stop the practice of leasing advertising space to companies providing
payday loan service, and in the alternative, that the MTA require payday
loan companies to disclose pertinent information in the advertisements.
We agree that consumers need clear cost information before making a
decision to borrow money. The Federal Truth in Lending Act applies to
the payday loan product, according to the Federal Reserve and numerous
court decisions. But, payday lenders avoid advertising or posting their
finance charges and annual interest rates. A requirement to hand a cost
disclosure to potential borrowers would add to federal credit disclosure
protections. Having demographic information about customers would be
informative to the city. Disclosure of the horrific terms of these loans
in all advertisements would also be a benefit to New Yorkers. Removing
the ads from the subways and buses would cut down on exposure to these
unconscionable loans by hardworking New Yorkers
However helpful, these solutions do not solve the problem of rent-a-bank
payday lending in the City. We recommend that the Council enact a local
law prohibiting any business from brokering or arranging payday loans
for any other party. While the City cannot regulate out-of-state banks,
it should police their non-bank partners that do business in the city.
If the City does not have the authority to enact such a local law, we
commend the Council for calling on the New York Assembly to do so in
Resolution 876 and on the United States Congress to do so in Resolution
871. Some states have already enacted anti-broker laws to stop store
front operations from brokering or arranging payday loans for banks
located in permissive states, such as Massachusetts, Maryland, Virginia,
Oklahoma, Colorado, Indiana and California.
Another step we urge the City Council to take is to memorialize the
New York regional office of the Federal Deposit Insurance Corporation
to vigorously investigate and enforce the FDIC's new Payday Loan Guidelines
against any banks in this region making payday loans. The only bank
we know about is County Bank of Rehoboth Beach, DE. It should matter
to the FDIC that one of its banks is partnering with servicing agents
to make loans at 780% in a state where the criminal usury cap is 25%
APR.
Thank you.
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