Payday loans are a poverty trap, a way to get the poor and desperate locked into a cycle of debt that traps them under an ever-increasing pile of high interest loans that they can't pay back. Because of their nefarious nature, New York and 14 other states have banned such loans. But under the cover of providing more financial services to poor neighborhoods, breakaway Democrats are pushing state legislation that consumer advocates fear could act as a backdoor to introduce the usurious loans here.
Two bills sponsored by state Sen. Diane Savino are currently before the state Senate's banking committee. One, known as the Community Financial Services Access and Modernization Act, would make it easier for check cashing companies to obtain licenses that would allow them to open storefronts around the state. The other, Senate bill 6121, would allow check cashing companies to provide "conduit services," which would let them partner with state and national banks in order to offer loans.
The modernization bill would streamline the ability of check cashing companies to obtain licenses to operate in the state and then open additional branches around the New York. It would also raise the ceiling on the size of a check such a business could cash, from $15,000 to $30,000, and let the businesses cash checks for workers compensation, pension payments, profit-sharing, and settlements—including lawsuit and settlement advance payments—without a ceiling.
A memo from a coalition of consumer advocates opposed to the bill—including the New Economy Project, the Western Law Center, and the Hebrew Free Loan Society—suggests these changes would be dangerous for consumers. In the instance of the raised cap on checks from $15,000 to $30,000, the group wrote that it is opposed because the bill doesn't set "any limit on the fees or reducing the check cashing rate that they charge." Also, the memo says, the change could cause personal danger to consumers leaving a check cashing place with "extremely huge sums of cash."
In the case of allowing check-cashing businesses to cash checks from lawsuit and settlement advance payments, the group wrote that those loans "are notoriously predatory products, typically sold to vulnerable low-income litigants at exorbitant rates and are comparable to payday loans" and would leave consumers vulnerable to a combination check-cashing fees as well as fees and interest related to the settlement advance loan.
Candice Giove, a spokeswoman for the breakaway Republican-allied Democratic group the Independent Democratic Conference, said the modernization bill's changes merely "reflect the full scope of financial services available at neighborhood 'check cashing' establishments." Giove also told Gothamist that Sen. Savino, an IDC member, believes that updating regulations helps "underbanked" neighborhoods that suffer from a lack of bank branches.
The second bill in front of the state Senate could allow check-cashing companies to circumvent state limits on interest rates. Federal law says that banks chartered in individual states are allowed to import interest rates based on the state where a bank is located in the case of a state bank and that nationally-charted banks can import their own interest rates no matter where they're located. New York currently considers interest rates above 16 percent to be usurious, and loans at rates of 25 percent or more can be grounds for criminal charges, but other states allow much higher interest rates. The bill contains language saying that any financial product offered through a conduit can't exceed New York's usury rate, but advocates say the federal rules could override this, opening the door to loans at rates currently considered usurious in New York.
"Conduit services is a giant portal for making high-cost and abusive loans, and is basically handing check cashers a key to gouge New Yorkers and violate our state usury laws," New Economy Project executive director Sarah Ludwig told Gothamist.
In a statement, Giove of the IDC wrote that "any conduit service agreements would require a written agreement of the exact nature of the services and that they must abide by New York State Usury law and this agreement would need to be approved by the Superintendent of the Department of Financial Services. DFS could deny any agreements that fail to meet their standards."
However, in another memo, the consumer advocates wrote that "there is no guarantee of perpetually vigilant supervision" from DFS, and that regardless of the bill's language, it's still "legally unenforceable against any and all national banks and federally-insured out-of-state banks."
There was also until recently a third bill in front of the state Senate that would have allowed for a "pilot program" from a California company that gives loans to low-income New Yorkers with poor and no credit history. The bill, sponsored by state Sen. Jesse Hamilton, would have allowed loans between $300 and $5,000 at 30 percent interest rates. Hamilton, also an IDC member, dropped his sponsorship this week.
Giove explained that "after speaking with advocates Senator Hamilton decided this was not the best approach and he is still looking for ways to increase access to credit in underserved communities."
Both remaining bills stem from a yearslong effort by the payday loan industry and its allies to allow check cashing companies to become lenders in New York State. The rough outlines of the pair of bills first appeared in a single piece of legislation last year that sought to allow check cashing companies to make small business loans to consumers. Errol Louis deemed the bill "staggeringly bad" in the Daily News. The new bills no longer allow check cashing companies themselves to underwrite loans, but they still present the risk of introducing high-interest loans into New York's underbanked communities, which are overwhelmingly low-income and nonwhite.
Ludwig said that she understands the need for more banks in poor neighborhoods of color. But she doesn't believe that expanding what check cashing companies can do will address the problem.
"There's no question banks have abandoned and fail to serve low-income communities and communities of color," she said. "It's part of institutional racism in our economy. But the solution to that is not to expand the capacity of fringe financial purveyors so they can extract more money from redlined communities."