Payroll industry in the sights of regulators
The payday advance industry is the subject of a recently announced multi-state investigation seeking information to enable regulators to determine if there are any illegal loans by online companies engaged in the business. Led by the New York Department of Financial Services (DFS), the eleven state regulators (plus Puerto Rico) are investigating whether payday loan companies are collecting usurious or illegal interest rates, often disguised as fees, tips or monthly subscriptions.
Employers have long allowed payday advances in which the company essentially advances to one or more of its employees’ salaries that have been earned but not yet paid. Companies have no obligation to make such advances, also known as “early access to wages,” but many have done so out of courtesy to their employees. To facilitate these advances, a separate for-profit industry has developed in which employers arrange with such companies to advance funds to their employees on a variety of terms, ranging from informal tips to service charges which can be relatively high. compared to the dollar amount of the advance.
Earlier this month, DFS Superintendent Linda A. Lacewell announced an investigation into the payday advance industry, whereby employees have access to wages they have earned but not yet received.
The DFS, as well as regulators in Connecticut, Illinois, Maryland, New Jersey, North Carolina, Oklahoma, Puerto Rico, South Carolina, South Dakota, and Texas , expressed concern over potentially illegal loan terms.
“[S]Some of these companies appear to charge usurious or otherwise illegal interest rates under the guise of “tips”, monthly subscriptions and / or exorbitant additional fees, and may impose inappropriate overdraft fees on vulnerable low-income consumers ” Lacewell said.
The investigation will focus on whether payday loan companies violate state banking laws, state usury laws, licensing laws and other applicable laws regulating payday loans and consumer protection laws.
“High-cost payday loans are under scrutiny in New York City, and this investigation will help determine whether these payday advance practices are usurious and harm consumers,” Lacewell said. “We will use all the tools at our disposal, including partnering with peer regulators to protect consumers from predatory loans and scams that trap families in endless debt cycles.”
The DFS has said it will send letters of inquiries to members of the payday advance industry.
Concerns about usurious interests in the payday advance industry are not new. The regulators, led by the New York attorney general, have conducted a similar survey last year regarding cash advances to merchants.
In a related case challenging cash advances to merchants, a New York state court ruled in a 2016 decision in Platinum Rapid Funding Group Ltd. vs. VIP Limousine Services, Inc. that a merchant cash advance structured as a purchase of the merchant’s future receivables is not a loan and therefore cannot be considered usurious. In this case, VIP entered into an agreement with Platinum whereby VIP sold its future receivables at an initial reduced price.
VIP then withdrew its consent for Platinum to electronically withdraw funds from its account, arguing that the agreements with Platinum violated New York usury law.
But the court rejected the request, ruling that the usury law only applies to loans or abstentions, no matter how cumbersome a repayment requirement. “The agreement was to purchase future receivables in exchange for an upfront payment,” Judge Jerome C. Murphy wrote. “The reimbursement was based on a percentage of daily revenue, and the period over which such a payment would take place was indefinite. The plaintiff took the risk that there could be no daily revenue, and the defendants took the risk that, if the revenue was substantially greater than expected, the repayment of the obligation could take place over an abbreviated period, the sum over and above the amount advanced being greater than 25 per cent.
“The court’s demand to convert the deal into a loan, with interest greater than 25%, would require unwarranted speculation and go against the explicit terms of the sale of future receivables under the merchant agreement. “
To read the notice in Platinum Rapid Funding Group v. VIP Limousine Services, Inc., Click on here.
Why is this important
This may be the beginning of the end for the somewhat more deregulated environment in which some payday advance companies have operated. While most employees appreciate them as a softer, gentler version of the payday advance industry, that could all change if regulators conclude that the associated fees are just illegal interest rates in disguise. Unlike merchants who claim to “sell” their future receivables, regulators can conclude that employee payday advances are loans that are subject to normal usury limits and consumer protections.