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)