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No Payday for Payday Lenders in Texas, New York

May 11, 2005
Payday lenders have lost big in two of the nation's biggest states. Texas' House of Representatives today defeated a bill that would have loosened restrictions on payday loans and a New York appeals court earlier this week upheld a ruling that voided hundreds of payday loans.

Payday Lenders • States Step Up Pressure On Internet Payday Lenders • Congress Moving Toward National Cap On Payday Loans • West Virginia Sues Online Payday Lenders • Senate Bill Would Rein in Payday Lenders • Virginia Considers Measure Aimed At Payday Lenders • Cash Today Hit with FTC Complaint • Payday Loans Can Lead to Bankruptcy • Pennsylvania to Require Licenses For Internet Payday Lenders • Bill Would Set National Limits on Predatory Lending • Payday Loan Lead Generators Settle FTC Charges • Tiny Virginia Town Stands Up To Payday Lenders • Payday Lenders Targeting Seniors • Payday Lenders Trumpet False Claims, Critics Charge • Pentagon's Predatory Lending Rules Faulted • Last Payday Lender Leaves West Virginia • Pennsylvania Class Action Challenges Payday Lender • Payday Lenders Fight Back in State Legislatures • Payday Lenders Fleece Consumers for $4.2 Billion A Year • Soldiers Pinned Down by Predatory Payday Loans • California Sues Payday Loan Business • North Carolina Declares Victory In War On Payday Lending • H&R Block To Settle More Payday Loan Suits • DOD: Payday Loans Affecting Military Readiness • States Want FDIC Crackdown on Payday Lenders • No Payday for Payday Lenders in Texas, New York • Payday Lenders Prey on African-American Neighborhoods • Payday Loan Report: Reform Needed • Illinois Warns of Payday Loans • Fast Cash Loans Charged with Illegal Practices • Cashback Payday Loans Banned in NY --- • Video: What is a Payday Loan? • Consumer Complaints

Without the state law, lenders in Texas operate under a bank model and use out-of-state affiliates to make loans, limiting interest rates and making it harder to squeeze more profit out of cash-short consumers.

The Federal Deposit Insurance Corporation (FDIC) has been taking a dim view of banks' involvement in payday loans and other forms of predatory lending.

In New York, an appeals court on Monday upheld a lower court decision shutting down a payday loan operation that targeted military families near Fort Drum; the decision voided hundreds of illegal loans.

The State Appellate Division Third Department affirmed a lower court ruling finding JAG NY - which operates three NY Catalog Sales stores in Watertown and Queensbury - engaged in a scheme to make illegal high-interest loans to consumers.

"It is clear that New York State will not countenance loan sharking of any kind," New York Attorney General Eliot Spitzer said.

In issuing the lower court ruling last January, Justice Bernard J. Malone of State Supreme Court in Albany found that NY Catalog Sales violated laws that prohibit usurious loans, forced consumers to agree to unconscionable contractual provisions that constituted fraud, and made loans without a license.

The January decision marked the first time a state court has found a payday loan offer to be a scheme to illegally circumvent New York’s usury law.

The lower court ruling found both NY Catalog Sales and its owner, John Gill, liable for the violations of law, and awarded monetary relief for injured consumers. The court decision also declared null and void any outstanding loan arranged by NY Catalog Sales with an interest rate that exceeds legal limits. It is estimated that there are hundreds of such loans.

The appellate court ruling will allow a court-approved referee to review each individual loan to determine restitution for defrauded consumers. It is estimated that the value will be in the hundreds of thousands of dollars.

In September 2004, Spitzer filed a lawsuit against NY Catalog Sales alleging that it was attempting to disguise its payday loans as "catalog sale" purchases. Payday loans are short-term unsecured loans that borrowers promise to repay out of their next paycheck. Due to the exorbitant interest rate of payday loans, as much as 400 - 900 percent, they are illegal in New York State.

N.Y. Catalog Sales promoted the availability of fast cash of up to $500 in advertisements, flyers and store front signs to attract consumers into its stores. Consumers were told that, for every $50 to be borrowed, they would have to buy $15 in gift certificates or catalog merchandise.

Consumers would then present the store with a check in the amount of the cash they wished to borrow and the cost of the merchandise or gift certificate. The store would agree to deposit the check on the consumer’s next payday.

As in most payday loan scenarios, NY Catalog Sales’ customers were usually unable to repay their loan on their next payday, and fell into a cycle of repeating their transactions so that they could use the newly borrowed cash to cover the existing debt. With every "roll-over" of their loans, however, the consumers were required to purchase additional merchandise or gift certificates, quickly resulting in the total cost of the purchases exceeding the amount of money received by the consumers.

In the past few years, Spitzer’s office has made other efforts to stop illegal payday lending schemes. In November 2004, Spitzer entered into a settlement with Las Vegas-based Cashback Payday Loans, Inc. which had been providing payday loans to New Yorkers over the Internet.

The settlement barred Cashback from lending in New York State, voided outstanding loans with New Yorkers, and required the lender to pay restitution.

In 2003, Spitzer filed a lawsuit to put a stop to a "rent-a-bank" scheme in which two Pennsylvania-based check-cashing companies contracted with a Delaware bank in an illegal effort to circumvent New York State’s laws that limit interest rates to 16 percent.

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