New York State Attacks Payday Loan Lenders: Claims ACH System the Weak Link

By | Aug 6, 2013

New York State’s financial regulator sent letters to 35 payday loan Internet lenders, instructing them to “cease and desist” from offering loans that violate local usury laws. The regulator, Benjamin M. Lawsky, ordered the lenders to halt the “illegal” loans within two weeks. New York outlaws any loans at rates above 25 percent annually.

Additionally, Mr. Lawsky requested 117 banks block online lenders from accessing New York consumer checking. He questioned why the ACH. network had allowed online payday lenders the “foot in the door” they needed to ensnare consumers. Mr. Lawsky “urged the banks to work with us to create a new set of model safeguards and procedures” that will identify illegal loans. (Jeez, this is like asking the wolves to guard the hen house!  Banks provide capital to payday lenders, offer competing loan products at very high rates to borrowers, and make a ton of money on the ACH transactions!)

My response?

Fact: Consumers want and need access to small dollar loans without a lot of hassle.

Fact: The costs associated with lending must be absorbed with sufficient profit to “remain in the game.” Lacking a reasonable profit (who gets to decide what is reasonable?) lenders will move on. Where do borrowers go?

Fact: Tribes are authorized by the Feds to participate in e-commerce as sovereign nations.

Fact: Regulators cannot end demand for small dollar loans Witness, alcohol, tobacco, sex, drugs, big coca colas…

Fact: Attacking the ACH system to force big brother down the throats of lenders and borrowers is not the answer. Silicon Valley is so far ahead of of bank 1.0 that no regulator can keep a lid on demand or loan proceeds delivery methods. New delivery systems are being created as I write this.
What authority will make the determination that a payday loan ACH occurred rather than an installment loan or a collateralized loan or a merchant cash advance or… too complicated.

Fact: The long-term answer to this “payday loan issue” is to ensure the continued existence of a multitude of loan products having full disclosure of all fees and costs available to consumers. Allow enlightened borrowers to decide what’s best for them.

Fact: Technology and competition already influence rates and forcing lenders to develop a multitude of loan products. Why should a resident of New York be forced to rob me for $300 when a resident of California can pay $45 to borrow $300 for two weeks?

Fact: There still remain 33+ states offering safe-harbor small dollar loan legislation in which an entrepreneur is legally able to offer a fairly priced loan product via the Internet or a brick-n-mortar. Proof not all state regulators are unrealistic.

What does Mr. Lawsky expect residents of New York to do when faced with a lack of cash to pay the rent, fix the car, turn on the gas… There are no lenders in New York offering a $300 loan at a rate 0f $1.44 per week in interest.

What do you think? Leave a comment with a fake email address so the regulators can’t track you down :o)

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12 Comments so far
  1. francine W August 7, 2013 3:40 pm

    So Jer, we’re a potentially new lender exploring… what do we do? Who can help us with this challenge? We have a huge national data base of consumers who we think we can successfully cross market small dollar loans to. How do we debit/credit their accounts?

  2. Martin August 7, 2013 3:41 pm

    Cut-off access to the ACH system and we’ll use EFT’s, stored value cards, an offshore vendor through 3rd parties, one of the 3 silicone valley startups that reached out to me this week… There is no end to the methods my lending company has available to meet the demand by borrowers.

    Much ado about nothing. The outcome of ACH discontinuance? Higher rates/fees will be paid by millions of borrowers and I’ll have less competition due to barriers of entry. The most sophisticated, better funded lenders will take market share. Demand for my product will not diminish unless the middle-class manages to survive and get/keep their jobs.

  3. Suki August 7, 2013 3:42 pm

    What’s an ACH and who cares? Just kidding! This issue is more about PR and developing strategies for enlisting the aid of our customers to whisper into the ears of the regulators and anti-payday loan advocates that they want access to our products.

  4. HY August 7, 2013 3:43 pm

    I’ve been in the business 10+ years. We operate 8 stores in 2 states. We average less than 5 ACH’s per store per month. So, all I can say is YIPEE! Good riddance to the competition who relies on this 😮 )

  5. Tribe Member August 7, 2013 7:02 pm

    “NAFSA Outraged at Breach of Tribal Sovereignty, Violation of Precedents Regarding Indian Country by New York Department of Financial Services – See more at: Native American Financial Services Association

  6. pesach kremen August 8, 2013 6:30 pm

    The payday lenders DO overcharge. they claim there is competition. Very little! It that were were case you would see payday lenders offering better rates than $45 on a $255 loan in California, but they. all charge the legal maximum. How come here are no payday loan stores in the wealthier neighborhoods? Just because people have no where else to turn is no excuse to gouge them. Limit the fees to $10 per $100 per month. This is still 120% compounded monthly. Also, the banks need to be regulated as well to stop charging fees way above their costs.

  7. Payday Loan Industry August 10, 2013 2:34 pm

    Pesach,

    I don’t follow your reasoning. PDL’s overcharge? Does a heart surgeon overcharge when he bills his patient $80K for 2 hours of work? Does Dave Ramsey overcharge for billing Clear Channel $14M/year for broadcasting 20 hours/week? Does Koby overcharge the Lakers? Who decides? THE CUSTOMER. Regarding Calif. there are a multitude of products under the Deferred Presentment and CFL licensing models having much lower APR’s if that’s how you choose to “measure” it. Who decides?

    Why would an investor place stores offering $255 loans in “wealthier neighborhoods?” You need an answer :o) Wealthier clients have access to private, “boutique” lenders offering much larger loan principals at various rates. They shop… they decide… which lender survives…

    Regulate, regulate, regulate… Let your daddy/mommy run your life. Regulation regarding full disclosure of all rates and fees lacking “tricks” are welcome. Regulation of product offerings and competition is not.

    Jer – Trihouse

  8. fawn August 11, 2013 11:37 am

    Can you imagine the gall? A number of states, including New York, have tried to eliminate the practice (payday loans) by capping interest rates. Yet the industry has proven resilient. Storefront lenders exploit loopholes by tweaking the terms of their loans, reclassifying themselves as other types of companies and lobbying aggressively for friendly legislation, according to a report this week by ProPublica.

    Unbelieveable that in America, where 14M consumers proactively APPLIED for a payday loan, that the lenders attempt to find ways to serve their borrowers AND “lobby aggressively” for friendly legislation! Don’t they get that Big Bro knows what’s best for all of us? ( PI )

  9. Payday Loan Industry August 11, 2013 11:43 am

    The Feds were watching my favorite yogurt shop today. Seems too many fat people are buying the large size and using the ACH via my bank card to pay. The Feds have defined my yourt shop as part of a “mass marketing fraud schemes — including deceptive yogurt shops that allow patrons to remain overweight.”

    “If we can stop the scammers from accessing consumers’ bank accounts — then we can protect the consumers and starve the scammers,” said Michael Bresnick, the former federal prosecutor who directs the task force, in written remarks before the Exchequer Club of Washington, D.C. No longer focused only on companies with a clear connection to the financial crisis, the group wants to protect consumers from “mass marketing fraud schemes,” he said.

  10. New Yorker August 15, 2013 6:36 am

    Well I’m glad that this is happening. I’ve had a payday loan and decided that I wasn’t going to pay the high interest… the collection activities are those of bottom feeding greedy people. Creating ECHECKS and disgusting collection calls from people who are idiots. Yeah I’m going to get arrested for owing a stupid payday lender $754 after paying $620 on a $400 loan. Sure it’s nice to have access, the point of the matter is that is people can’t make the outrageous interest payments, then what good is the loan. You people are misguided and absolutely greedy..you prey on people and when theorey don’t pay you threaten, berate and attempt to ruin their lives with your ruthless and disgusting collection practices. I hope the government shuts all of you down, Tribal, OffSore whoever you are hiding in the pit of life.

  11. Red Rhyder August 24, 2013 9:22 am

    Lots of good info in the article. Enjoyed the comments. If you get in a bind and need quick cash, it is very helpful that payday loans are available. It is a quick loan and I’ve gotten loans for 15%, with the money in hand the next day. Lots of payday lenders available at http://www.needaloan.info

    Thanks Everyone.

  12. Payday Loan Industry August 24, 2013 11:13 am

    Caution consumers! Only do business with lenders you can identify, have full contact information, belong to OLA, CFSA, FISCA…

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