A bill that would allow check cashers to issue short-term loans passed through the State Senate Banking Committee late last month. If the bill passes, it would guarantee check cashers a profit and allow the State Banking Commissioner to set interest rates higher than the 25 percent interest rate cap allowed by New York State law.
While 15 senators voted in favor of the bill in committee, no outside groups other than the check-cashing industry appear to support the measure. The Assembly banking committee approved the bill last fall.
New Yorkers for Responsible Lending--a coalition of 151 groups including AARP, Legal Aid Society and the Empire Justice Center--opposes the bill (S.3841/A.7047), as does the New York City Department of Consumer Affairs. These critics say that the Financial Service Centers of New York or FSCNY (formerly the Check Cashers Association of New York) is attempting to take advantage of the credit problems of poor people as a backdoor way to provide high-interest payday loans, which are outlawed in New York State.
“This state’s interest-rate cap is the single greatest protection consumers enjoy. The idea that we’d blow open that interest cap for one industry is nuts,” says New York City Department of Consumer Affairs Commissioner Jonathan Mintz. “New York City strongly opposes this bill. These are absolutely 'payday' loans, and to call them anything else is disingenuous.”
'Payday loans' by another name?
Payday loans are considered a dirty word in New York. They are small, short-term loans that often have interest rates of 400 percent or more, according to the Center for Responsible Lending. Borrowers, mostly low-income, often take out one loan out after another, leading to a cycle of debt. Such loans (called "payday" loans because they are typically meant to sustain people between paydays) are prohibited in New York and 12 other states, although many New Yorkers illegally get payday loans that are available on the Internet, where lending is less regulated. The trend among states has been towards regulating these loans.
“No state has authorized these loan products since 2005,” says Diane Standaert, an attorney with the Center for Responsible Lending. “That was the last time there was an exemption from usury law," a statute that many states have limiting the amount of interest that can be charged on loans. "Since that time, a number of states have rolled back that exemption through legislative action and the ballot box."
But Ed D’Alessio, the deputy general counsel for FSCNY, which wrote the outline of the bill, vociferously denies that it would allow for payday loans. Under the law, he says, check cashers would issue regulated loans that would serve as an alternative for the one million New Yorkers who get payday loans via the Internet, phone, or other paths to out-of-state providers.
“These loans have none of the features of a payday loan,” D’Alessio says. “We took great pains to address what we knew would be criticism. The opposition seems to be glossing over all these things.”
According to the website of the Federal Deposit Insurance Corporation (FDIC), “there is no universal definition of payday lending.” However, FDIC attempts to define it, by stating that “Payday loans are small-dollar, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment.”
Based on the first part of the FDIC definition, the loans permitted by the new law appear would look very much like payday loans. The New York bill proposes small-dollar loans, between $300 and $2,000, or 25 percent of a borrower's gross income, whichever is less. These loans allow borrowers 90 to 180 days to repay their debt, and can be paid in installments (which is short-term, but less so than the typical payday loans which is usually paid back after only two weeks). There are no assets that the borrower is using as collateral against the loan, and the loan is not underwritten.
Then there’s the second part of the definition: The interest rate. FDIC says that the annual percentage rate on payday loans "can range from 300 percent to 1,000 percent, or more.”
This is where things get tricky. The New York bill doesn’t set the interest rate, but rather charges the State Superintendent of Banking with setting it. This role would go to Benjamin Lawsky, the new superintendent of the newly formed State Department of Financial Services.
Standaert, from the Center for Responsible Lending, says she’s never seen a bill that changes the usury law where the interest rate wasn’t already set.
But the bill's backers say this aspect of the law is aimed at providing a fair rate-setting process. “If we set the rates ourselves, everybody’s going to go nuts,” D’Alessio from FSCNY says. “When the superintendent sets these rates, all of these groups in opposition can come and be heard.”
The bill guarantees “the reasonable profit for licensees from the offering and provision of short-term financial services loans; and the rate of return on investment or such other risk adjusted profitability standard as the superintendent may determine to be necessary.” To opponents, this looks like a guaranteed profit for the lending industry.
“[Check cashers] have to have a reasonable return on their business, if you want to combat the evils that are out there," like Internet payday loans and high banking overdraft fees," D'Alessio says. "But these rates will be nowhere near as high as those of payday loans.”
Opponents counter that requiring profits is setting the stage for high interest rate loans.
They also take issue with a provision in the bill directing the banking superintendent to consider what other states charge on similar loans. Since other states might offer payday loans, the opponents are concerned this would lead New York to permit even higher rates.
“The loans would have to be high enough to require a profit, and … the fees of those charged by similar lenders in other states, those are 300 or 400 percent,” says Sarah Ludwig, co-director of the Neighborhood Economic Development Advocacy Project (NEDAP), which strongly opposes this legislation.
D'Alessio says the reference to other states has been misinterpreted and will likely be removed. Indeed, Senate sponsor Sen. Hugh Farley (R-Schenectady) says that amendments to the bill are currently being discussed.
Behind the Vote
Though check cashers are the only constituency actively lobbying for this bill, state legislators of all political persuasions also support it. It passed through the Assembly banking committee this fall as one of Asemblyman Darryl Towns’ last orders of business before the Brooklyn Democrat was appointed commissioner of New York State Homes and Community Renewal.
On May 18, the bill passed 15-4 through the Senate banking committee, with support from legislators including Sen. David Carlucci, who was elected to the Senate in 2010.
“Initially I read the bill and thought that it was a gimmick,” says Carlucci (D-Rockland/Orange). “But after I interviewed the new director of financial services, Mr. Lawsky, I have a lot of confidence that he’ll make the right decisions [with regard to rate-setting]. If I hear specific objections that these regulations are weak, I’ll reconsider.”
Check cashers aren’t just a place to cash checks. They’re an organized interest group in New York State. The New York Check Cashers PAC, run by FSCNY, has given $464,049 in donations since 2000, including $7,400 to Towns; $18,900 to bill sponsor Farley and $46,800 to Sen. Jeffrey Klein (D-Bronx/Westchester), another cosponsor. According to campaign finance records, seven out of the 15 senators who voted for the bill received money for the New York Check Cashers PAC, while no senators who voted against the bill received money from them.
According to campaign finance records, Carlucci didn’t get funding from the Check Cashers PAC. Some supporters such as Sen. Diane Savino (D-Staten Island), who voted the bill out of committee, are actually heavily funded by unions such as D.C. 37 that opposed the bill. (Savino’s office didn’t return calls for comment.)
“I would like to believe some of the people who voted for this bill were fooled,” Mintz says. “What I fear is the Check Cashers Association is having an undue effect on public policy.”
Assembly member Annette Robinson (D-Brooklyn) was an original sponsor of the bill in the Assembly but withdrew her support, she says, after learning more about the legislation.
“I felt that at this time, it would not be good for my community,” Robinson says. “It was a different time and a different place. Looking at how payday loans are operating, my community shouldn’t need to pay double the amount of loans in interest.”
Agreement on the problem
One place where supporters and opponents of this bill agree is that right now low-income people are using high-interest loan products. They just disagree on the solution. While FSCNY and supporting legislators want this bill to pass, others say the answer is to increase access and awareness to low-interest loans.
For example, a 2008 study by the New York City Department of Consumer Affairs found that despite a rise in the number of credit unions—banking collectives that offer low-interest loans to people with bad credit—in Jamaica, Queens and Melrose in The Bronx, New York, an estimated nine percent of those areas' residents get payday loans, and 25 percent get credit through pawnshops or rent-to-owns a few times a year.
“People are really strapped,” NEDAP's Ludwig says. “A lot of people don’t make enough money to get by on. The answer is to support credit unions and other community banks that do make small loans.”
And though New Yorkers can easily get payday loans on the Internet, advocates say they plan to lobby the attorney general to change that.
“The argument that 'People get payday loans on the Internet, so we need them here' make no sense,” says Bill Ferris, AARP's New York State legislative representative. “We should look at ways to outlaw the bad loans in the Internet, and keep them out of New York state.”
After passing the Banking Committee, the Senate bill was referred to the Finance Committee because of the expected fiscal impact on the State Banking Commission, which would be responsible for implementing the law. In order to reach the full Assembly, it will need to pass the banking committee again.
With the legislative session winding to a close, this bill is likely not to be completed before the gavel drops, but can be revived in the fall.
The New York State Banking Department didn’t respond to media requests from City Limits, but State Sen. Liz Krueger (D-Manhattan) says, “I have been advised that the banking department is opposed to this bill. As far as I can tell it’s the check cashers in support, and everyone else opposed.”
Senator Gustavo Rivera voted against bill S.3841 in the Senate, not Assemblyman Peter Rivera as was stated in the original version of this article. Rivera has received funding from the New York Check Cashers Association, and was originally listed as a multi-sponsor, but has withdrawn support of the bill,as was originally stated.