Earlier this month, NY Attorney General Letitia James launched a lawsuit against two short-term “cash advance” lenders, DailyPay and MoneyLion (doing business as “Instacash”), for conducting exploitative, deceptive, and usurious practices.
Payday lending is nominally illegal in New York, but certain companies deny that they should be classified or regulated as such because they do not charge mandatory fees or interest, and do not pursue debt collection against borrowers. Arkansas, South Carolina, and Utah have enacted laws recognizing that similar services are not a form of lending.
Conversely, legislation is pending in New York to ban the practice, which is estimated to cost New Yorkers $500m each year – an expense largely shouldered by working class people.
The AG’s lawsuits bring both state and federal claims under the Consumer Financial Protection Act. Last year, the CFPB published an interpretative rule stating that it would classify some of those services as lending, but that is unlikely to be enforced after the body was subject to massive cuts.
Lending or advancing?
According to two complaints filed by James in New York state court, MoneyLion and DailyPay offer “paycheck advances” in exchange for fees for instant availability of cash.
Astoundingly, the companies also frequently collect payments in the form of voluntary tips, which the complaints contend are collected through algorithmic pressure. Those upfront costs allowed the lenders to skirt New York’s strict consumer interest rate caps. If counted as interest, the cash advance fees could represent APRs as high as 750%; half of all MoneyLion’s loans exceeded a 500% APR.
MoneyLion also allegedly employed deceptive advertising practices, which promised “instant access to funds, a zero percent interest rate, and a fee-free product.” But in reality, MoneyLion charges minimum fees for instant cash advances, which are almost always utilized.
Further, to maximize fees, MoneyLion artificially set lending increments at $100, even though its advertisements promised access to $500, the complaint added. It would also use abusive practices to induce borrowers to take out further loans to pay back previous loans, the complaint stated, hooking lenders in a vicious cycle.
The other lender, DailyPay, functions by contracting with employers, who share live payroll data. DailyPay extracts a fee on payday.
As collateral, borrowers assign all rights and title to their wages owed and promise to not interfere with repayment. “DailyPay then employs layers of protection – extensive credit underwriting, direct recourse against employers, and employees’ obligations to assist in collection – to ensure a collections rate above 99.99%,” the complaint noted.
DailyPay preemptively sued James to stop her lawsuit, arguing that it was not a true payday lender because it does not require fees on all transactions and does not engage in debt recovery lawsuits or collections against borrowers.
It further claimed that James was engaging in an “overbroad attempt to declare on-demand pay products illegal.”
Jared DeMatteis, DailyPay’s chief legal strategy officer, said: “The actions taken by the Attorney General’s office suggest that it prefers consumers to rely on loan sharks or pay higher overdraft and late fees.”
AG James begged to differ: “Promising New Yorkers financial freedom while pushing them into outrageously expensive loans is downright shameful. These are payday loans by another name. While many New Yorkers are worried about making ends meet, DailyPay and MoneyLion are making tremendous profits by extracting workers’ hard-earned wages.”
