In a shot across the bow of online payday lenders who allegedly disregard state law where their borrowers reside, a New York County grand jury recently voted a criminal usury and conspiracy indictment against 12 companies allegedly involved in such lending and their owner, chief operating officer, and general counsel. Manhattan District Attorney Cyrus Vance issued a press release criticizing the “exorbitant interest rates and automatic payments from borrowers’ bank accounts” to which New York borrowers were subject. This appears to be the first enforcement action of its kind against payday lenders.

According to the indictment, prosecutors claim that the defendants offered loans to New York residents at annual interest rates that ranged from 350 to 650 percent, exceeding the state’s maximum of 25 percent. The indictment further asserts that the alleged scheme utilized a number of companies to create a “systematic and pervasive usury scheme” and conceal the defendants’ participation in distributing the loans.

While we are aware of past threatened criminal usury proceedings against payday lenders, The New York Times suggests that criminal usury charges against payday lenders “are rare,” and in our experience they are generally seen in the organized crime context. As far as we know, this is the first criminal case against a payday lender, but the Times reports that “this case is a harbinger of others that may be brought to rein in payday lenders that offer quick cash.” According to the Times, officials have indicated their intention to expand investigations to other entities that allegedly assist unlawful payday lenders.

As noted in a previous alert, the New York State Department of Financial Services (DFS) reached out to banks, debt collectors, and NACHA last August regarding their alleged roles in facilitating the distribution and collection of illegal payday loans. Last September, New York Attorney General Eric Schneiderman announced several settlements with a number of payday lenders and at that time said his “office will continue to crack down on an industry that exploits desperate consumers across our state.”

This week the New York County District Attorney took what we believe is an unprecedented step against payday lenders. In the future, other industries could also be targeted. For example, as we recently warned, the debt collection industry is under increasing government focus. All companies providing financial services to subprime customers should be vigilant in ensuring that they fully comply with applicable civil and criminal laws in every jurisdiction they touch, as well as emerging UDAAP standards addressing unfair, deceptive, and abusive acts and practices.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance. The firm’s White Collar Defense/Internal Investigations Group represents clients across a range of industries, including financial institutions, in government investigations ranging from regulatory actions and state and federal grand juries to search warrants and warrantless searches. 

Our attorneys, including the attorneys who joined us from the New York City litigation firm Stillman & Friedman, P.C., to form Ballard Spahr Stillman & Friedman LLP, have substantial experience in handling litigation with the New York County District Attorney, DFS, and the New York Attorney General.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or, White Collar Defense/Internal Investigations Practice Leader Henry E. Hockeimer, Jr., at 215.864.8204 or, John C. Grugan at 215.864.8226 or, Beth Moskow-Schnoll at 302.252.4447 or, James A. Mitchell at 212.223.0200 x8006 or, or Marjorie J. Peerce at 212.223.0200 x8039 or  

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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