What is the Fort Drum Loophole?
With its usury caps of 16 and 25 percent, New York effectively bans pay day loans. Then why does it seem that pay day lenders continue to do business in the State? The story behind the so-called Fort Drum Loophole demonstrates why pay day loans are one area that can only be effectively controlled on the federal level.
Licensed lenders are neither banks nor credit unions. They are state-licensed corporations authorized to simply lend money. As state licensed entities, it would seem that they clearly have to comply with New York’s laws and regulations. So, how is it that for more than a decade Omni Loan Company, a Nevada corporation, has been able to provide loans well in excess of New York’s usury limits to members of the military in the Fort Drum area.
Article IX, Section 40 of the New York Banking Law regulates the loans made by licensed lenders to “individuals then resident in this state.” In 2005, Omni Loan obtained a legal interpretation from the then-Banking Department opining that the “resident” requirement in the statute permitted it to make loans to non-resident military personnel stationed on New York military bases. Fast forward to Monday, when the Cuomo administration announced that it was withdrawing this opinion and that Omni had agreed to become licensed in New York State.
The Fort Drum exception demonstrates yet again that if someone really wants a pay day loan in New York State, they are going to get one, despite the best efforts of the DFS. The simple truth is that we have a multistate, dual charter financial system and technology makes it easier than ever to connect unscrupulous lenders to desperate borrowers. Credit unions should more aggressively market and highlight the pay day loan alternatives they offer to their members. In addition, they should support the CFPB’s nascent efforts to regulate these loans provided that the regulation is not drafted too broadly.