In a groundbreaking move that is being watched nationwide, Manhattan District Attorney Cyrus Vance brought criminal charges this week against MyCashNow.com, an online payday lender based outside New York that offers loans over the internet.
I discussed the case with Law360 (paywall), which has some interesting implications that I elaborate on here.
A trail of money that began with triple-digit loans to troubled New Yorkers and wound through companies owned by a former used-car salesman in Tennessee led New York prosecutors on a yearlong hunt through the shadowy world of payday lending.
On Monday, that investigation culminated with state prosecutors in Manhattan bringing criminal charges against a dozen companies and their owner, Carey Vaughn Brown, accusing them of enabling payday loans that flouted the state’s limits on interest rates in loans to New Yorkers.
Such charges are rare. The case is a harbinger of others that may be brought to rein in payday lenders that offer quick cash, backed by borrowers’ paychecks, to people desperate for money, according to several people with knowledge of the investigations.
As I alluded to in my comments to Law360, one interesting angle is that New York’s usury statute criminalizes interest rates on most payday loans that exceed 25%. This is a very unusual statute for its combination of a low interest rate and a criminal prohibition (per the Consumer Federation of America, only New Jersey has a similar statue). In the past, lenders have been able to engage in successful regulatory arbitrage by locating their operations in one state and offering loans in another. DANY alleges the MyCashNow.com defendants did something similar here, by operating a complex web of out-of-state entities but then offering illegal loans in New York (and then wisely declining to bring collection actions for unenforceable debts).
One thing that distinguishes this case is that the DA actually has a powerful tool in the NY usury law to go after that kind of conduct. I have to think the threat of prison chills web-based payday lenders a little bit, though the uniqueness of the operative statutory prohibition may limit the implications of this decision as it leaves a lot of other markets available, potentially 48 states. Of course, it could catalyze further action by other states or federal enforcement agencies, including the Consumer Financial Protection Bureau, which has already taken an interest.
But the payday lending industry does not exist in a vacuum. About 10% of Americans are unbanked, and many of them (as well as some who have traditional bank accounts) need emergency loans sometimes but lack the credit or collateral to secure them via ordinary means. With any luck, this case will also help catalyze interest in lending to the unbanked and underbanked, perhaps including via postal banking, which Mehrsa Baradaran wrote about recently.