June 13, 2000
To the Institution or Organization Addressed
Re: Payday Loans
Since issuing an All Institutions letter regarding payday loans on June 29, 1999, the Banking Department has become aware that banks and other companies are continuing to advertise and offer these loans in New York State. Payday loans are typically made at usurious rates of interest as described below.
As both a preventive measure and an effort to elicit additional information from consumers, we are taking this opportunity to once again clarify the Banking Department's view of certain practices pertaining to payday lending.
In order to make payday loans in New York, an entity must be either a bank or it must be licensed as a small loan company. No entities licensed by the Banking Department engage in this particular type of business in New York. However, out of state companies are making this type of loan.
Just recently, the New York State Banking Department contacted one company, that is neither a bank nor a licensed lender. This company had been offering payday loans in New York State and has now agreed to immediately cease taking applications for payday loans from New York State residents.
Non-bank companies that offer payday loans in New York, even if licensed as a Licensed Lender under Article 9 of the Banking Law, may not charge an annual interest rate that is in excess of 25%. Banks that offer these loans may export the interest rate permitted in their home state. Banks are permitted by federal law to offer a single maximum rate of interest to customers across the United States. However, banks that choose to offer this type of loan product at exorbitant interest rates are blatantly abusing this authority. These types of actions, when judged in the court of public opinion, can lead to a groundswell of outrage resulting in reputational harm and safety and soundness problems.
Payday loan companies typically grant advances to individuals against their next paycheck. In return for the advance, the company typically charges a "fee". For example, for a fee of $35, a payday loan company might agree to make the borrower a two-week advance of $120. In order to obtain the loan, the borrower would agree to write the company a check for $155 that the lender agrees to hold until the borrower's next payday. If funds are still insufficient to cover the check once the borrower's paycheck is deposited, the payday loan company might agree to renew the loan for another period, thereby resulting in additional fees for the borrower.
As illustrated above, payday lenders typically charge high "fees" for their services. It should be noted that if the loan advanced results in an annual interest rate in excess of 25%, then a New York lender would be in violation of §190.40 of the New York State Penal Code. Furthermore, it is the Banking Department's position that any and all charges to the borrower to obtain the loan, irrespective of how they are identified, constitute interest and are subject to the 25% limitation. Violators of this provision will be vigorously prosecuted.
If you have any complaints, concerns or questions regarding the issuance of payday loans in New York State, or if you have obtained this type of a loan in New York State, please contact the Banking Department's Consumer Hotline at 1-800-522-3330. We appreciate your attention to this matter.
Superintendent of Banks