Payday lenders have a bad reputation, and the news coming out of New York this week isn’t going to change that anytime soon. This after two payday lenders and a Delaware bank were forced to pay more than $5 million to 14,000 consumers who were victimized – usually through paying higher interest rates than legally allowed. How did New York hold these payday lenders accountable?
The story begins with three companies: Telecash, Cashnet and County Bank of Rehobeth Beach, Delaware. According to the New York State Attorney General’s office, all of the companies were charging onerous interest rates for payday loans. Some loans came with interest rates of 500% or more. Backed by County Bank, the two payday companies set up shop mainly in the New York boroughs of Brooklyn and the Bronx and preyed on low-income New Yorkers who needed short-term loans – usually between $100 and $500 – which the borrower has to repay within a short period of time, but at a high interest rate.
Payday loans are problematic for many borrowers, but especially for low-income consumers who are often forced to extend – the industry term is "rollover" – the repayment timetable by paying exorbitant interest. According to a U.S. Congressional panel in Washington that’s studying the payday loan issue, borrowers are charged about $15 for every $100 borrowed for a two-week period. The panel says that translates into an interest rate of 390% annually. The study also says that payday loan operators draw many “repeat” borrowers, with the typical customer borrowing funds seven times a year.
A separate study by Paige Marta Skiba, of the Vanderbilt University Law School, and Jeremy Tobacman, of the Wharton School at the University of Pennsylvania, says that an estimated 10 million American households borrow on payday loans each year.