The loan sharks in your pocket

Right now, on your smartphone, there are loan sharks ready to devour your money: harmless-looking apps that lend at predatory annual percentage rates over 300%—rates that violate New York’s usury law.

These are payday loan apps. These lenders trap people in long cycles of reborrowing and debt. Depending on the app used, the typical borrower takes out between around 25 and 100 loans a year.

Here’s how this debt trap works: The app issues a loan, under $100 on average, to a low-income worker or another person who usually cannot afford the loan without quickly borrowing again. Using access to the borrower’s checking account or payroll, the app collects on the loan and fees in full automatically on the borrower’s payday—around two weeks after the funds were advanced—or sooner. That leaves borrowers short on cash for basic expenses, forcing them to take out another loan—and then the cycle repeats.

New York can stop this debt trap for its residents and set an example for other states to follow.

Last year, Attorney General Letitia James sued two of the biggest app-based payday lenders, DailyPay and MoneyLion, for illegally high interest rates and deceptive marketing. The lawsuit revealed how they put people on a debt treadmill; for example, DailyPay issued 450 loans in less than two years—over 4.5 weekly on average—to one New Yorker, who paid nearly $1,400 in fees.

To support the attorney general’s crackdown on predatory lending, the state Legislature should pass legislation introduced by Sen. Samra Brouk of Rochester and Assemblymember Steven Raga of Queens: the Stop Taking Our Pay (STOP) Act (S8939, A9644). Because payday loan apps baselessly claim their loans are exempt from credit laws, this bill would make it unmistakably clear that the state interest rate cap applies to them. Enacting the STOP Act would strengthen New York’s ability to enforce the law and prevent its residents from getting fleeced.

Meanwhile, at the federal level, a U.S. House of Representatives committee recently voted to send to the entire House legislation (H.R. 9330) that would exempt these apps from state and federal laws that prohibit usury, discrimination, hiding costs, and overcharging military servicemembers. House Minority Leader Hakeem Jeffries and Senate Minority Leader Chuck Schumer, both New Yorkers, can stand up for the Empire State and protect consumers by uniting Democrats against this bill.

In the apps’ legal evasions and debt trap business model, they are using a playbook nearly identical to that used by brick-and-mortar payday loan storefronts, which infamously also issue unaffordable 300%-plus APR loans. (Storefront payday lenders do not operate in 20 states, including New York, because of usury laws).

Both types of payday lenders gave their loans names intended to trick people into thinking these loans are not a form of credit. Companies behind the apps call them “earned wage access.” Three decades ago, storefront payday lenders claimed to offer “deferred check cashing.” Smartphone and storefront payday lenders have played this linguistic charade in pursuit of weaker regulations that let them take more money out of people’s pockets.

The costs of payday loan apps are exorbitant. On average, a person borrowing from these apps pays an APR over 10 times higher than what someone carrying a balance with a below prime credit card pays. For the typical borrower using MoneyLion or DailyPay, that would add up to paying over $350 more in interest annually. (Genesee Co-op Federal Credit Union and Self-Help credit unions only lend below the 18% APR cap set for federal credit unions.) Even this cost comparison understates how expensive these apps are as their users get access to far less cash, for less time, than people using below prime credit cards.

These apps damage the financial standing of bank customers and credit union members. Research from New Economy Project, a New York economic justice organization, shows that in just eight years, payday loan app companies extracted around $700 million in fees from New Yorkers with the fewest financial resources. Many New York credit unions are calling for the state Legislature to enact the STOP Act to stop this drain on our communities.

By prohibiting triple-digit interest rates, this bill would also end the incentive for apps to trick people into paying hidden fees.

Their tricks include advertising 0% interest for instant access to funds but charging fees for that expedited access. Some apps charge membership fees. Some disguise fees by calling them “tips” and using behavioral psychology to solicit them. New Yorker Jose Bedoy called it “strange” how, before receiving an advance, the app “Dave, in the form of a cuddly little bear … would ask me for a tip.” Indeed, a lender soliciting a tip is an inappropriate money grab.

Another New Yorker who has used an app, Drew Brown, describes borrowers “constantly playing catch-up just to get the full strength of the paycheck that they’ve earned.” Drew tells of apps deceptively advertising $500 advances while routinely extending far less. By keeping advances small, apps increase the number of loans borrowers must take out to reach the advertised amount. Since almost all loans have a fee, more loans results in more fees and higher profits.

The costs add up. Researchers at the Center for Responsible Lending analyzed anonymized bank account transactions, with five leading apps, covering one year after a consumer’s first advance. They found that a typical app user was compelled—by the shortfall the app perpetuates—to borrow twice as frequently as when they started, rising from two to four loans per month. App users also became more likely to incur overdraft fees and more likely to borrow from multiple apps simultaneously.

Payday loan apps drag people down into financial quicksand. State and federal government regulators and legislators have a clear obligation. Rather than encouraging app-based payday lenders’ harmful practices by exempting them from consumer protections, our government should hold these companies accountable to consumers and the law. 

Dan Apfel is the CEO of Genesee Co-op Federal Credit Union, a community development credit union serving over 4,500 members in the Rochester area. Mike Calhoun is the president of the Center for Responsible Lending, a nonpartisan research and policy nonprofit that is an affiliate of the Self-Help community development credit unions.

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