A very dangerous bill has made alarming progress in Albany the last few legislative sessions and I fear more of the same in the next session. It masks itself as offering consumers in financial need a lifeline, but in reality it threatens New Yorkers' single greatest financial protection. The "short-term financial services loan act" would end New York's interest rate cap of 25 percent to facilitate perhaps the most damaging predatory consumer loan there is: the payday loan. This bill offers the quicksand of successive loans, coupled with sky-rocketing interest rates. What's worse, these loans would be sold by check cashers, who are angling to enter the predatory lending game.
In fact, industry lobbyists would not only override the State's interest rate cap for the first time, but they wrote the bill in a way that purposefully declines to even set a new cap.
The industry claims that payday loans can be a responsible short-term loan business model and that customers are often able to repay their loans because they're due on payday. But in March the Center for Responsible Lending (CRL) released a study that found that most consumers actually get hooked into a cycle of borrowing and repaying, only to have to borrow again as the interest piles up. According to CRL, 12 million Americans are trapped every year in a cycle of 400 percent interest payday loans.
Another concern is that check cashers are only regulated by the Banking Department to ensure certain disclosures and fees that pertain to cashing checks. There are no regulations to ensure these are safe, responsible loans, legally marketed and sold.
Payday lenders also spend a tremendous amount of money to ensure that their customers become "regulars." It's common practice for them to call their clients on a weekly basis offering cash to "get by" or to suggest they take $500 instead of $100 "just to be on the safe side." The reality is that as more Americans fall behind on their payments, the industry has grown rapidly, and in the last few years has made record profits from more than $42 billion in loans.
Consumers in need of short-term loans can turn to community development credit unions and other nonprofit, regulated lenders whose mission is to serve the community. In New York City, consumers also have widespread access to free, one-on-one, professional financial counseling at the City's Financial Empowerment Centers.
At our Financial Empowerment Centers, 56 percent of our clients come to us because of debt and 49 percent of city households currently have more than $4,000 in credit card debt. As the economy struggles to its feet, the last thing that New Yorkers need is a new pathway into debt. Let's prevent payday loans' predatory grasp from reaching New Yorkers by telling our legislators that we oppose this bill.
Jonathan Mintz is the commissioner of the New York City Department of Consumer Affairs.