New York Goes On Warpath Against Payday Loans
New York Attorney General Eric Schneiderman yesterday filed a lawsuit in State Supreme Court in Manhattan against Western Sky Financial and a subsidiary seeking to block it from offering payday loans. The Attorney General argues that the company is violating New York’s usury laws, which cap loan interest at 16% when offered by non-bank lenders. All interest rates are capped at 25% in New York State.
The catch is that Western Sky Financial is located on tribal land in South Dakota and contends that it is not subject to either New York’s laws or its jurisdiction. According to the AG, through the Internet it has made a total of almost 18,000 loans to New Yorkers who now owe almost $185 million to the company.
In a separate action last week, New York’s Department of Financial Services issued a cease and desist order against 35 payday lenders including Western Sky. The DFS also wrote a letter to NACHA criticizing the electronics payment network for being unable to block payday loans. Under existing NACHA regulations, it is the responsibility of the originating financial institution to ensure that payments are lawful before sending them on to the receiving depository financial institution (RDFI). At least some credit unions have received a letter from the DFS inquiring about the way they process payments and deposits through the NACHA system.
This dispute shows no signs of resolution. The use of Indian Reservations is just an extreme example of the jurisdictional issues involved when institutions from other states seek to export high-interest loans into a state like New York that has usury limits. My guess is that our good friends from the CFPB will soon be joining the fray. This is ultimately a national problem that can best be dealt with on a national level.