We've all heard of 'Pay Day' loans, but with the fees, and short term, the actual 'interest rate (APR) will exceed 300%.
States are now stepping up and 'No More.'
Suit Accuses Online Lender of Violating New York Rate Caps
By JESSICA SILVER-GREENBERG
Eric T. Schneiderman, the New York attorney general, contends Western Sky violated laws that cap rates on loans at 25 percent.Fred R. Conrad/The New York TimesEric T. Schneiderman, the New York attorney general, contends Western Sky violated laws that cap rates on loans at 25 percent.
New York State’s top prosecutor filed suit on Monday against an online lender that offers short-term loans at interest rates of more than 300 percent, the latest warning shot in a sweeping battle by state authorities to enforce local interest rate caps.
Eric T. Schneiderman, the New York State attorney general, sued Western Sky Financial and its affiliates, which claim connections to American Indian tribes — ties that the lenders have argued immunize them from federal and state laws.
Visitors to Western Sky’s Web site are greeted by a logo of three tepees against a yellow sky. The lender, which says it operates “within the exterior boundaries of the Cheyenne River Sioux Reservation” in South Dakota, has argued that the tribal affiliation puts Western Sky beyond the reach of state regulators, including Mr. Schneiderman.
Mr. Schneiderman was not convinced. In the lawsuit, which was filed in the State Supreme Court, Mr. Schneiderman accused Western Sky and its affiliates of violating state usury laws that cap interest rates on loans at 25 percent.
From their perch online, the lawsuit said, the so-called payday lenders engage in “an illegal and deceptive scheme to originate high-interest, personal loans to consumers in New York.”
Mr. Schneiderman’s office contends that Western Sky and its affiliates have made at least 17,970 costly loans to New York residents since 2010. The interest and fees alone, the lawsuit says, amount to nearly $185 million. The lender, Mr. Schneiderman said in the suit, “preys upon New York consumers facing financial hardships with limited options.”
A spokeswoman for Western Sky said that it had not “had the opportunity to review the complaint,” adding that the company was confident “that we have complied with applicable laws in our business practices, and we stand behind those practices.”
Springing from an investigation that began last year, the lawsuit aims to stop the companies from making more loans in the state and to void those loans that they have already made. Mr. Schneiderman is also looking to extract tens of millions of dollars from the lenders — a sum that consists of a fine and a refund to New York borrowers of all the interest payments made in excess of the state’s interest rate caps.
In his suit, Mr. Schneiderman outlined his suspicions about how the operations work. Once consumers apply for loans through Western Sky’s Web site, their applications are shuttled to subsidiaries in California, which finance the loans, the suit said. The arrangement, the suit said, means that the loans are in Western Sky’s “name only,” while the subsidiaries “bear the risk.”
With his action on Monday, Mr. Schneiderman joined a group of state prosecutors fighting to keep online lenders from flouting state restrictions on the loans — a campaign that has gained urgency as government officials try to shield residents, desperate for cash, from the expensive loans.
Almost since their inception two decades ago as storefront check-cashing stores, payday lenders have been controversial. As states have imposed interest rate caps, the lenders have shifted their operations to more hospitable places, including Belize, Malta and the West Indies, where they can more easily evade the statewide ceilings on interest rates. Extolling the benefits of operating offshore in a 2005 deposition, one payday lender put it starkly: the move to foreign places offers “lawsuit protection and tax reduction.”
Facing increasingly hostile state laws, several lenders, including Western Sky, are forging ties with American Indian reservations. Through these pacts, the lenders argue, they are part of a “sovereign nation” and not subject federal and state laws. Still, the prosecutors are redoubling their efforts to police the lenders. In at least nine states, including Colorado and Missouri, regulators have taken aim at the lenders with ties to Indian tribes.
New York State’s action against Western Sky follows other regulatory moves. In April, Western Sky was fined by Oregon’s Department of Consumer and Business Services, which accused it of promoting loans with interest rates of 342 percent “through an aggressive TV and radio advertising campaign.” Lori Swanson, the attorney general of Minnesota, sued Western Sky, accusing it of violating a state cap on interest rates.
Minnesota acted after Colorado’s attorney general sued Western Sky in 2011, accusing it of illegally making roughly 200 loans to state residents. In a promising move for Colorado, a district court judge said in May that the lenders’ tribal ties did not shield Western Sky from state law. The judge noted that borrowers obtain the loans while living in Colorado, not on the reservation.
The company has said that it “is the largest private employer on the impoverished Cheyenne River Indian Reservation.” Now, the battle with Western Sky is shifting to New York. Last week, Benjamin M. Lawsky, New York’s top banking regulator, sent letters to the company and 34 other online lenders, ordering them to “cease and desist” from making the “illegal” loans, according to documents reviewed by The New York Times.
New York authorities are also scrutinizing the banks that provide a critical gateway for the lenders to gain access to borrowers’ bank accounts. The banks, state officials say, enable the lenders to automatically withdraw loan payments from borrowers’ checking accounts, even in states where the loans are effectively outlawed.
Last week, Mr. Lawsky implored 117 banks to stop the online lenders from gaining access to New York residents’ checking accounts.