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.                                                  
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