Appellate Court Upholds Decision Voiding Payday Loans

Attorney General Spitzer today hailed an appellate court ruling that upheld a lower court decision shutting down a payday loan operation that targeted military families near Fort Drum, and voiding hundreds of illegal loans.

The State Appellate Division Third Department issued a decision late yesterday that affirmed a lower court ruling finding JAG NY - which operates three NY Catalog Sales stores in Watertown and Queensbury - engaged in a scheme to make illegal high-interest loans to consumers.

In issuing the lower court ruling last January, Justice Bernard J. Malone of State Supreme Court in Albany found that NY Catalog Sales violated laws that prohibit usurious loans, forced consumers to agree to unconscionable contractual provisions that constituted fraud, and made loans without a license.

The January decision marked the first time a state court has found a payday loan offer to be a scheme to illegally circumvent New York’s usury law.

"It is clear that New York State will not countenance loan sharking of any kind," Spitzer said.

The lower court ruling found both NY Catalog Sales and its owner, John Gill, liable for the violations of law, and awarded monetary relief for injured consumers. The court decision also declared null and void any outstanding loan arranged by NY Catalog Sales with an interest rate that exceeds legal limits. It is estimated that there are hundreds of such loans.

Yesterday’s appellate court ruling will now allow a court-approved referee to review each individual loan to determine restitution for defrauded consumers. It is estimated that the value will be in the hundreds of thousands of dollars.

In September 2004, Spitzer filed a lawsuit against NY Catalog Sales alleging that it was attempting to disguise its payday loans as "catalog sale" purchases. Payday loans are short-term unsecured loans that borrowers promise to repay out of their next paycheck. Due to the exorbitant interest rate of payday loans, as much as 400 - 900 percent, they are illegal in New York State.

N.Y. Catalog Sales promoted the availability of fast cash of up to $500 in advertisements, flyers and store front signs to attract consumers into its stores. Consumers were told that, for every $50 to be borrowed, they would have to buy $15 in gift certificates or catalog merchandise. Consumers would then present the store with a check in the amount of the cash they wished to borrow and the cost of the merchandise or gift certificate. The store would agree to deposit the check on the consumer’s next payday.

As in most payday loan scenarios, NY Catalog Sales’ customers were usually unable to repay their loan on their next payday, and fell into a cycle of repeating their transactions so that they could use the newly borrowed cash to cover the existing debt. With every "roll-over" of their loans, however, the consumers were required to purchase additional merchandise or gift certificates, quickly resulting in the total cost of the purchases exceeding the amount of money received by the consumers.

In the past 1 ½ years, Spitzer’s office has made other efforts to stop illegal payday lending schemes. In November 2004, Spitzer entered into a settlement with Las Vegas-based Cashback Payday Loans, Inc. which had been providing payday loans to New Yorkers over the Internet. The settlement barred Cashback from lending in New York State, voided outstanding loans with New Yorkers, and required the lender to pay restitution.

In 2003, Spitzer filed a lawsuit to put a stop to a "rent-a-bank" scheme in which two Pennsylvania-based check-cashing companies contracted with a Delaware bank in an illegal effort to circumvent New York State’s laws that limit interest rates to 16 percent.

Consumers wishing to file complaints against a payday lender are encouraged to contact the Attorney General’s consumer help line at (800) 771-7755.

This case is being handled by Assistant Attorneys General Mark Fleischer and Joseph Wierschem of the Consumer Frauds and Protection Bureau.