New York State Makes New Efforts to Combat Payday Lenders

Curbing abusive payday lending practices can sometimes resemble a game of Whac-A-Mole: every time regulators manage to push down one method the industry uses, another new method seems to crop up.

Payday lending, which is illegal in New York State, has managed to pop back up through online sites, Native American affiliations and, now, through the use of debit cards.

In an effort to end what he sees as another way into borrowers’ accounts, Benjamin M. Lawsky, New York State’s top financial regulator, is sending cease-and-desist letters to 20 companies suspected of making illegal payday loans, 12 of which appear to use debit card information to do so.

The New York Department of Financial Services and Gov. Andrew Cuomo’s office on Tuesday also announced an agreement with Visa and MasterCard to provide information that could help both companies investigate illegal transactions within their networks. Both card processors have a policy of investigating suspicious activity and taking the appropriate steps to stop it.

“I don’t know that there are that many routes or avenues into the banking system where you can pull money out of New Yorkers’ accounts,” Mr. Lawsky said. “At a certain point, at least, our hope is that they’re going to run out of avenues.”

Payday lenders issue loans tied to a borrower’s paycheck, and online lenders typically deduct money directly from a bank account. But authorities have put pressure on the Automated Clearing House system, which processes those transactions, to reject payments that facilitate illegal activity.

In response, a growing list of lenders are now requiring borrowers’ debit card information as backup, a tactic state regulators hope MasterCard and Visa can help eliminate.

“This is a proactive concerted effort with the state,” said Seth Eisen, a spokesman for MasterCard.

Mr. Lawsky’s latest efforts are part of his office’s broader crackdown on online payday lenders, whose small-dollar loans, often to low-income borrowers, have come under fire for taking advantage of the financially vulnerable.

In August, the Department of Financial Services sent cease-and-desist letters to 35 online lenders, some of whom it accused of charging annual interest rates as high as 1,095 percent. The department says that as a result of the letters, most of those businesses have halted lending to New York State customers.

Over the past few years, a number of states have introduced tougher laws to curtail abusive lending practices. According to Diane Standaert, the senior legislative counsel for the Center for Responsible Lending, no new states have legalized payday lending since 2005.

As a result of tougher laws, many lenders have transitioned from brick-and-mortar stores to online sites, where it can be easier to skirt statewide usury rules and interest rate caps. In the past, borrowers might hand over multiple physical checks to ensure future payment, but online lending has given lenders an automatic payment tool that can be difficult for borrowers to discontinue.

“That trend toward cascading payment authorization means that now more than ever, lenders are prioritizing direct access to a borrower’s bank account to secure payment and force collections,” said Tom Feltner, the director of financial services at the Consumer Federation of America.

Some lenders have also begun partnering with Native American groups, which are often exempt from certain federal and state regulations. Those affiliations have also drawn scrutiny from regulators who worry that the ties give lenders another way to circumvent consumer protections.

But the payday industry says that regulators often go too far, and that their financial products provide a valuable service to people who may not otherwise have access to credit.

In an email, Peter A. Barden, the director of communications and operations at the Online Lenders Alliance, an industry trade organization, emphasized that the group’s members abided by federal laws, including truth in lending rules.

“Members of Congress as well as the financial services industry have expressed deep concern that regulators are continuing to pressure payment processors and banks to bend to their will and choke off legal industries they don’t like from the consumers who want their products,” Mr. Barden said in a separate email. “We need a federal solution that prevents the payment system from being politicized while also preserving and expanding consumer access to credit.”