Andrew M. Cuomo & Benjamin M. Lawsky
Governor Superintendent

April29, 2014

Martin Elliott
Senior Director Brand Protection
Visa, Inc.
900 Metro Center Blvd.
Foster City, CA
94404

Dear Mr. Elliott:

The New York State Department of Financial Services (“DFS”) has discovered a disturbing new tactic that online payday lenders are using to illegally withdraw funds from New York consumers’ bank accounts.

As pressure has mounted surrounding online payday lenders’ abuse of the Automated Clearing House (“ACH”) network, some payday lenders are migrating to
debit cards to process illegal payday loan transactions with New Yorkers. Fortunately, this trend appears to be in its early stages and the Visa debit network has strong protections that prohibit the processing of illegal transactions.

This letter confirms proactive commitments that Visa has made in discussions with DFS to quickly halt the processing of illegal payday loans through the
Visa debit network before it becomes a widespread problem.

Payday loans are small-dollar loans that are typically due at a borrower’s next paycheck. These loans carry fees that frequently exceed 400 percent as an annualized interest rate. Lenders misleadingly advertise payday loans as short-term solutions when, in fact, the loans trap borrowers in a cycle of debt that can take many months to repay.

Payday lending is illegal in New York and 14 other states as well as the District ofColumbia.2 In New York, payday loans are illegal under both its civil and criminal laws. Under New York General Obligations Law § 5­501 and Banking Law§ 14-a, it is civil usury for non-bank lenders (such as payday lenders) to make loans or forbearances under $250,000 with an interest rate exceeding 16 percent per annum. Further, under New York Penal Law §§ 190.40 and 190.42, it is criminal usury to make a loan in New York with an interest rate exceeding 25 percent per annum. ln addition, subject to the provisions of General Obligations Law§ 5-511, usurious loans made in New York by non­

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For instance, the loans typically require borrowers to pay the fee first before paying down the principal. Because the fees are so high (typically $30 per S I00 borrowed), often borrowers are only able to afford to pay the fees when the loans are due. and so the principal is left untouched. Borrowers then must either renew the loan or take out a new loan to pay off the old one. The result of this cycle is that many borrowers are unable to pay off any of the principal for months, and are left paying much more in interest than the original value of the loan. 2 In addition to the District of Columbia, the 15 states that prohibit payday loans are Arizona, Arkansas, Connecticut. Georgia. Maryland, Massachusetts, Montana. New Hampshire. New Jersey. New York, North Carolina. Ohio, Pennsylvania, Vermont. and West VIrginia. Susanna Montezemolo, Center for Responsible Lending. Payday Lending Abuses and Predatory Practices 33 (Sept. 20 13), availabk at http://papers.ssrn.com/sol3/papers.cfm’ abstract_id~ 239 !40. (~l~) 709-‘ 5·10 I ONE STATE STREET. NEW YORK, NY l000.:I-l 5ll I WWW DFS NY.CiOV
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bank lenders are void and unenforceable; therefore, collection of debts from payday loans violates General Business Law§ 601(8) and 15 U.S.C. §§ 1692e(2) and 1692f (l) of the Fair Debt Collection Practices Act Finally, Banking Law § 340 prohibits unlicensed non-bank lenders from making consumer loans of$25,000 or less with an interest rate greater than 16 percent per annum.

For over a year now, DFS has conducted an extensive investigation of online payday lending in and to New York. Although payday lending is illegal in New York, some payday lenders have attempted to evade state law by offering and making payday loans to New Yorkers over the Internet Over the past year, DFS has taken a variety of actions to stop illegal online payday lending into New York. In February of last year, DFS issued warnings to debt collectors
attempting to collect on illegal payday loans. Then, last August, DFS sent cease and desist letters to 35 online lenders making usurious loans to New Yorkers. DFS has also sought the cooperation of the banking community and NACHA, the private association overseeing the ACH network, in preventing illegal payday lending from flowing over the ACH network into New York.

While strengthening the ACH network is an important piece of DFS’s approach, payday lenders may use a variety of payment systems other than ACH to entrap New Yorkers in a vicious cycle of debt. In the course of its investigation, DFS recently identified a new trend among some online payday lenders in processing payments from payday loan borrowers. These lenders have begun notifying borrowers that they are no longer using the ACH system to process
payments, and that they are now requiring borrowers to use a debit card to make their loan payments.(3) The lenders also prominently display the Visa and MasterCard logos on their websites. This migration from the ACH network to debit networks is likely a result of stepped­ up regulatory efforts to ensure that the ACH network is not a conduit for illegal, fraudulent, and predatory activity. Since debit networks are independent of the ACH network and are governed by a different set of rules, DFS is acting quickly to prevent online payday lenders from switching payment systems to evade New York law. DFS believes that the steps Visa has agreed to take will serve as a model for collaboration between DFS and the debit card industry to get ahead of
this emerging problem.

As one of the largest debit network providers with a highly trusted brand, Visa has an important role to play in protecting the integrity of its debit network. Indeed, Visa already has strong rules in place that require acquiring financial institutions to monitor their merchants for illegal activity, including violations of law in the state where the cardholder resides. In recent discussions with DFS, Visa committed to taking several additional steps that would help ensure that acquiring financial institutions are aware of the risks of payday lenders. The additional steps that Visa has committed to take are:

* Visa will work with acquiring financial institutions to ensure that they are not processing illegal debit card transactions on behalfofpayday lenders. On an ongoing basis, DFS will provide Visa with information concerning payday lenders that may be either lending into New York illegally or using debit networks to collect on illegal loans from New Yorkers. This information will include the names of the lenders, URLs, and any other identifying information that may be usefuL Visa will investigate the matter and take appropriate action with the payday lender’s acquiring financial institution to cease Visa activity with that lender.

* Visa will alert all acquiring banks ofthe risks ofdoing business with payday lenders that may be operating in violation of state law. Visa will send a Visa Business News (“VBN”) alert to all the acquiring financial institutions in Visa’s debit network about illegal payday lending and New York laws prohibiting payday lending. DFS will provide content for the VBN alert and a DFS message that explains the illegal activity and relevant New York laws. The VBN alert will also remind acquiring financial institutions of Visa rules that apply concerning the processing of illegal transactions by merchants.

DFS appreciates Visa’s leadership in taking prompt action to prevent its debit network from becoming the latest payment system that payday lenders use to violate state law. Visa’s cooperation is critical to protect New Yorkers from the predatory debt-trap of illegal payday loans. We look forward to collaborating with Visa in the coming months. If you have any questions, please contact Executive Deputy Superintendent Joy Feigenbaum at 212-480-6082.

Very truly yours,
M. Lawsky
Superintendent of Financial Services
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Another nail in the coffin… Fodder for conversations on the halls of Congress this week in D.C!
Jer@TrihouseConsulting.com