Bleeding the Borrower Dry

By The New York Times | Editorial

04 March 2013

ew York is one of 15 states that have banned the predatory, high-interest loans that payday lenders commonly use to pillage low-income borrowers. But offshore lenders increasingly get around state laws by issuing predatory loans over the Internet. Worse still, as the Times's Jessica Silver-Greenberg reported recently, banks in the state are profiting from the loans by allowing the Internet lenders to automatically withdraw payments from the borrower's account, in some cases without his or her permission. When the borrowers - or their lenders - overdraw on the accounts, the banks get to collect fat overdraft fees.

About 12 million borrowers turn to payday lenders each year. The loan model that lures them in is based on deception. Customers are told, for example, that they can borrow small amounts, perhaps a few hundred dollars, which they are supposed to repay in full within a short period, typically two weeks. The promotional material does not let on that the loans, which carry annual interest rates of 500 percent or more, are structured in a way that inevitably turns a short-term obligation into long-term debt.

A new study by the Pew Charitable Trusts finds, for example, that only about 14 percent of borrowers can afford to take enough out of their monthly budget to repay the average payday loan. Instead, average borrowers carry a debt for five months, during which time they pay repeated fees to renew the loan. By the fifth month, someone who borrowed $375 will have paid about $520 in interest alone. Many also resort to borrowing from another payday lender. Not surprisingly, payday borrowers are more likely than others to default on credit card debt, to file for bankruptcy or to lose their bank accounts because of abuse of overdraft privileges.

New York State passed one of the strongest anti-usury laws in the nation in 1976, making it a felony for lenders to charge in excess of 25 percent interest. Even so, New Yorkers are still preyed upon by out-of-state payday lenders, which collect payments through an automatic withdrawal process.

Under federal law, bank customers have a right to revoke a creditor's automatic withdrawal privileges. They can also simply close an account whenever they choose. A federal lawsuit brought against JPMorgan Chase Bank by two customers in New York shows how difficult exercising these rights can be.

One plaintiff was besieged by payday lenders that had charged her an annual interest rate of nearly 800 percent - clearly illegal in New York - and continually tried to debit her bank account, triggering $34 overdraft fees. She asked the bank in March 2012 to close her account, but it remained open for two months, during which the lenders attempted to debit her some 55 times, ringing up $1,523 in overdraft and other fees.

Chase has promised to revisit its policies. But judging from consumer complaints nationally, this problem is not unique to New York. Congress and state governments need to crack down on these practices.

A bill pending in the Senate, known as the Safe Lending Act, would require all online lenders to comply with state laws that provide stronger consumer protections than the federal statutes. It would establish once and for all that payday loan borrowers have the right to stop lenders from raiding their bank accounts. State and federal regulators also need to prohibit banks from giving payday lenders access to the automatic payment system in states where predatory, high-interest loans are illegal.