Industry Letters

Payday Loans

June 29, 1999

TO THE INSTITUTION OR ORGANIZATION ADDRESSED:

RE: PAYDAY LOANS

According to recent press reports, payday loan companies have begun to proliferate in several parts of the country. While we are aware that such practices exist in other states, the Banking Department does not currently have any complaints on record for New York. It should be noted that in order to make payday loans, 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 may be making this type of loan via the Internet. As both a preventive measure and an effort to elicit additional information from consumers, we are taking this opportunity to clarify the Banking Department’s view of certain practices pertaining to payday lending.

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, are 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 such 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.

Sincerely,

Elizabeth McCaul
Acting Superintendent of Banks