NY Attorney General Settles Action against Law Firm Collecting on Payday Loans

The New York Attorney General recently announced a settlement with Forster & Garbus, a large debt collection law firm that had filed collection actions against consumers arising out of payday loans. Specifically, Attorney General Eric Schneiderman alleged that the firm had collected consumer debts on behalf of NCEP, LLC (NCEP). The Attorney General claimed that in five cases the firm attempted to collect on payday loans, which are illegal under New York law. (New York General Obligations Law Section 5-501 and Banking Law Section14-A provide that loans of $250,000 or less with an interest rate of at least 16 percent are usurious. Loans with rates exceeding 25 percent are criminally usurious.)

Forster & Garbus had claimed that it was unaware that these consumer debts arose out of payday loans and that it ceased collection actions after receiving notice from the Attorney General. Mr. Schneiderman rejected this defense, explaining that “debt collection firms must make certain that the underlying loan is not a payday loan before filing a lawsuit, and they will be held responsible if they fail to do so. Ignorance is no excuse.”

Among other things, the settlement prohibits Forster & Garbus from filing any collection action unless it verifies in writing only after reviewing the underlying loan documents that the subject loan is not a payday loan. Forster & Garbus also must investigate any written complaint from a customer alleging that a prior judgment or settlement involved a payday loan. If the firm determines the debt arose out of such a loan, it must vacate the judgment and pay restitution to the consumer of any amount that had been paid on the judgment. Lastly, Forster & Garbus agreed to pay $10,000 in costs and penalties.

Payday lending has been a major focus of the Attorney General and New York Department of Financial Services (DFS). This enforcement action is consistent with recent actions by the Attorney General targeting law firms and repossession companies attempting to enforce payday loans in New York. However, the action against Forster & Garbus establishes that the Attorney General takes the position that the burden is on these companies—prior to beginning collection efforts—to first confirm that the underlying debt is a payday loan. We believe the Attorney General and the DFS will continue to adopt a very aggressive position against any company that is helping payday lenders to operate in New York.

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