The Cuomo administration, through the New York State Department of Financial Services (DFS), recently announced aggressive enforcement-related activities in an ongoing DFS investigation designed to stop supposedly unlawful payday lending to New York consumers over the Internet. DFS asserted that the loans violated New York civil and criminal usury laws.

Notably, DFS not only took action against payday lenders themselves, but also raised its concerns over these loans with banks, debt collectors, and NACHA, the organization that administers the Automatic Clearing House (ACH) network through which electronic or ACH payments on the loans are processed. Payday loans are short-term, small-value loans typically structured as an advance on a consumer's next paycheck.

Specifically, DFS has taken the following actions: 

• It has sent letters to 35 companies that allegedly used the Internet in making payday loans, demanding that they “cease and desist offering and originating illegal payday loans in New York.” The letters cite New York’s civil usury limit of 16 percent per annum on loans of $250,000 or less and its 25 percent per annum criminal usury limit. The letters also state that usurious loans by nonbank lenders are void and unenforceable under New York law and, accordingly, collecting debts arising from such loans violates state law and the federal Fair Debt Collection Practices Act (FDCPA).
  
  DFS has demanded that each payday lender confirm in writing “that the company and its subsidiaries, affiliates or agents no longer solicit or make illegal payday loans in New York, and outline the steps taken to cease offering these loans to New York consumers.”


• DFS also has written NACHA, stating that the illegal payday loans are made possible by debits and credits passing through the ACH system “without sufficient mechanisms” to block these debits/credits. DFS noted the roles played by both Receiving and Originating Depository Financial Institutions in the lending process and stated that its actions against the payday lenders demonstrate “that illegal payday loans are getting through the system.”
  
  Consequently, DFS asserted that “changes to the ACH network will most likely be necessary.” In addition, DFS asked NACHA to work with the agency “to choke off ACH access” to the 35 payday lenders ordered to cease and desist, “as well as the broader illegal payday lending industry.” DFS requested NACHA's “prompt cooperation” and a meeting with its representatives.


• DFS sent letters to 117 banks, asking them to work with DFS “to create a new set of model safeguards and procedures to choke off ACH access” to the 35 payday lenders. DFS contended that “banks have proven to be—even if unintentionally—an essential cog in the vicious machinery” used by those lenders. DFS cites a NACHA bulletin indicating that the bank receiving an ACH debit (the borrower’s bank) does not have a basis to assess independently whether a specific transaction was properly authorized and related to a legal transaction. According to the bulletin, such a bank becomes aware of a questionable transaction only when contacted by its customer.
  
  The letter also notes that NACHA “places the onus on the banks originating the debits … to conduct sufficient due diligence consistent with NACHA Operating Rules.” The letters ask the banks to inform DFS of the steps they are able to take in their capacities as receivers or originators of ACH debits “to stop illegal payday loans from entering into New York through the ACH network.” Stating that DFS is interested in “what changes are necessary both within your bank and at the ACH network level to stop these illegal loans,” the agency asked for the opportunity to meet with the banks. 


• DFS also wrote debt collection companies operating in New York, advising them not to attempt to collect on payday loans made by the 35 lenders unless they confirm that the loans were not usurious. Noting the various New York statutes prohibiting usurious loans, DFS warned that it will take aggressive enforcement action against persons or entities attempting to collect unlawful payday loan debts on behalf of those lenders.

This enforcement activity signals a commitment from DFS to stop unlawful payday lending in New York through an approach that includes broad-based changes. While targeting the activities of the payday lenders themselves, DFS also is seeking significant change for the lending process at the financial-systems level. This approach poses significant implications for financial institutions and other industry participants, especially regarding the ACH network.