Being poor in America isn't cheap.
But when it comes to payday loans, cash-strapped Americans are even more likely to get hit by sky-high interest rates. Now, the Manhattan district attorney's office is accusing a set of companies controlled by a Tennessee businessman of breaking the state's limits on interest rates.
The indictment comes at a time when the payday loan industry is thriving, with lenders generating at least $7 billion in revenue annually by providing short-term loans to desperate workers. While considered a boon by some workers who need to make the rent or pay for groceries, a number of states have enacted laws to either restrict or ban the service all together.
In New York State, payday loans are illegal, with the state's Department of Financial Services warning that the loans are "designed to trap borrowers in debt." At the same time, loans offered in New York have a rate cap of 25 percent, although some online operators of payday loan services have sought to skirt that limit.
According to the indictment, Carey Vaughn Brown of Chattanooga, Tennessee, allegedly structured a "systematic and pervasive usury scheme" that offered payday loans well above the 25 percent rate. Through businesses such as MyCashNow.com, an online payday lending site, Brown and his business associates allegedly charged annual interest rates of as much as 650 percent, the indictment charges.
Paul Shechtman, an attorney for Brown, told CBS MoneyWatch that his client "acted in good faith." "My client relied on what he believed was sound legal advice," he said.
"Payday lending is a short-term fix that can result in a lifetime of debt and credit problems," said District Attorney Cyrus R. Vance in a statement. "The exploitative practices - including exorbitant interest rates and automatic payments from borrowers' bank accounts, as charged in the indictment - are sadly typical of this industry as a whole."
Regardless of how the indictment proceeds, payday loans appear to be here to stay. About 12 million American adults rely on the short-term loans, with a borrower on average taking out eight loans per year of about $375 each and spending $520 in interest, according to the Pew Charitable Trusts.
Those who rely on payday loans are usually tapping them to cover daily expenses, with more than two-thirds using the high-interest loans to pay for utilities, rent or food, Pew found. Only about 16 percent of Americans who take out the loans do so to cover unexpected costs, such as an emergency, it found.
The payday loan industry has attracted the attention of the Consumer Financial Protection Bureau, with its director, Richard Cordray, saying in March that the agency is "concerned" about consumers sliding into debt traps caused by the high rates. In May, the CFPB said it was considering "whether rulemaking is warranted" for payday loans.
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