Court Halts Illegal Payday Loan Scheme

Attorney General Spitzer today hailed a court decision that voids hundreds of payday loans, many of which were made to military families near Fort Drum.

Albany County State Supreme Court Justice Bernard J. Malone issued a decision finding JAG NY and its owner John Gill - which operate three N.Y. Catalog Sales stores in Watertown and Queensbury - engaged in a scheme to make unconscionably high-interest loans to consumers.

Justice Malone's decision affirmed Spitzer's allegations that NY Catalog Sales violated a state law that prohibits usurious loans, forced consumers to agree to unconscionable contractual provisions that constituted fraud, made loans without a license and engaged in illegal debt collection practices.

Justice Malone found that NY Catalog Sales owner, John Gill, is personally liable for the violations of law and the monetary relief for injured consumers.

Last September, 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.

According to the decision, a court-approved referee will review each individual loan to determine restitution. At that time, Spitzer's office will seek a court judgment against JAG and Gill in an amount representing the excessive and illegal interest payments made by consumers. It is estimated that the value of the judgment will be in the hundreds of thousands of dollars.

In addition to requiring restitution, the court decision 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.

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 must buy $15 in gift certificates or catalog merchandise. Consumers would then present the store with a post dated check in the amount of the cash they wish 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 their previous check. With every "roll-over" of their loan, however, the consumer was required to purchase additional gift certificates, quickly resulting in the total cost of the certificates exceeding the amount of the individual's loans.

NY Catalog Sales is the first payday scheme to have been found by a state court to illegally circumvent New York's usury law. Last November, Spitzer's office entered into a settlement with a Las Vegas-based payday lender, barring it from lending in this state and requiring that it void outstanding loans with New Yorkers and pay restitution.

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.