A well-known financial shark.

New York Prosecutors Go After Tennessee Loan Sharks

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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I try not to give legal advice around here, but here's some advice about giving legal advice. If you give someone legal advice, and he's arrested for doing what you told him to do, and you're arrested for telling him to do it, and the best your lawyer can manage is, "it remains to be seen whether the advice Ms. Temple gave was incorrect or in violation of any laws," that's probably not good. Like, if you're giving legal advice on the theory that you're not yet sure that giving that advice is a crime, maybe just don't give that advice?

I don't have much other insight into the big criminal usury case that Manhattan district attorney Cyrus Vance announced today against a batch of payday lenders. I mean: Apparently usury is a crime in New York! It's a felony to charge more than 25 percent interest unless you're "authorized or permitted by law to do so"; the indictment says that this means "it is a crime for an unlicensed lender to charge more than 25 percent per annum interest on any loan less than $2.5 million."

The gist of the dispute here is that one Carey Vaughn Brown, and his lawyer Joanna Temple, set up a cluster of payday lenders -- ACH Federal, Credit Protection Depot, Owls Nest LLC, MyCashNow.com, etc. etc. -- mostly in Chattanooga, Tennesee (and a little bit in the British West Indies), and those companies made payday loans to people in New York that violated New York usury laws. The question for discussion is, can you get in trouble for violating New York usury law if you're in Tennessee, or even the British West Indies? And the answer is, of course you can, you can get in trouble for violating New York money laundering laws if you're in Cuba, everyone on earth is probably violating New York financial laws all the time, come on. This is not legal advice.

The indictment doesn't get into this issue too much, though. It's mostly just a long string of boring paragraphs like this:

6. On or about February 14, 2008, in New York County, defendant ACH Federal withdrew and received $500 in principal and $107.07 as interest from Bank of America bank account # 009468282374, held by a New York County resident, as repayment to defendants MyCashNow and CPD for a $500 loan that carried an interest rate of approximately 355 per centum per annum.

There are also paragraphs about the defendants depositing money in customer accounts, though the loans and repayments don't seem to be paired. But from the annual interest rate, it looks like that paragraph above means that someone borrowed $500 from MyCashNow and paid back $607.07 about 22 days later, by having it deducted directly from his or her bank account. (That's the way these loans worked: You authorize MyCashNow or whoever to directly deposit and withdraw money from your account, so they deposit the loan and then withdraw the loan plus interest a few weeks later.) And, sure, if you annualize that interest you'll get some number that is way, way, way higher than 25 percent, so, busted.

There are 44 numbered paragraphs of "overt acts" -- a mix of those deposits and withdrawals and interludes of legal advice -- and 22 of them mention Bank of America accounts. What else was happening in Bank of America accounts at around that time?

Bank of America also publishes a pamphlet that is available to customers at its branches entitled a "Personal Schedule of Fees" (the "Fee Schedule"). ... The Fee Schedule provides "Overdraft Item Fee and NSF: Returned Item Fee -- For the first day your account has an occurrence, fee for each overdraft item and for each returned item" is "25.00 each item" effective April 18, 2008. ... The Fee Schedule further provides: "For the second and subsequent days your account has an occurrence, fee for each overdraft item and for each returned" is "35.00 each item." An "occurrence" is defined as "a day with at least one overdraft item or one returned item."

That's from one (settled) class action complaint against Bank of America over its overdraft practices. Here's another one:

For example, on December 4, 2007, the Bank sent Mr. Yourke a notice that, as of December 3, 2007, the Bank had received notice of five transactions, for $32.83, $4.35, $4.35, $6.05 and $39.46, that his account had become overdrawn for each of those transactions and that the Bank had charged $35 fee for each such transaction, for a total of $175.

The lawsuits are mostly about shady ordering of the transactions ("If the Bank had not manipulated and reordered the transactions from highest to lowest, Mr. Yourke would have incurred only two overdraft fees instead of five overdraft fees"), but never mind that now. The point is: This guy "borrowed" $87.04 from Bank of America and had to pay back $262.04. If he took 22 days to pay it back, that's an interest rate of 3,335 percent. Or around 3,000 percentage points more than what MyCashNow was charging. MyCashNow would have given him $500 instead of $87.04, charged him $107.07 instead of $175, and probably given him more time to pay it back than Bank of America did.

Obviously there's a reason that people go to payday lenders: They need money quickly, and their alternative ways of getting money quickly look even less attractive. Their bank, for instance: 10 times less attractive.

That doesn't mean that MyCashNow et al. aren't shady, or violating the law, or that prosecutors shouldn't go after them. But one thing that might be nice is if people could get small short-term loans, secured by their bank accounts, offered by responsible lenders at terms that are less, um, usurious than those imposed by banks for overdrafts.

There's a lot of room between 25 percent and the 355+ percent charged by these outfits, and you could imagine a responsible lender, taking into account administrative costs and the risk of nonpayment, occupying some of that room. But enforcing a 25 percent cap on interest rates -- with felony indictments! -- means that only felons will give loans with interest rates above 25 percent, and that those loans will have rates that are way above 25 percent. Or rather: only felons and Bank of America.

  1. I ran this a few ways and my best guess is that the annual rate that the indictment quotes is a simple interest rate based on a 365-day year, i.e. 355% = (365/22) * (107.07/500). That gets you pretty close to integer numbers of days from the numbers in the complaint, whereas other methods of calculating (daily/weekly/continuous compounding) get you further away from whole days. On the other hand, if you assume continuous compounding and a 365-day year, then this loan looks like it was for 20 days. Doesn't matter that much.

  2. Things like:

    On or about April 6, 2009, defendants Joanna Temple and Scenic City Legal Group advised defendants MyCashNow, Credit Protection Depot, Support Seven and others to discontinue collection effort communications with a New York resident borrower who filed a complaint against MyCashNow (i) alleging that payday loans were illegal in New York; (ii) requesting MyCashNow's license number; and (iii) stating that the borrower would file complaints with the Better Business Bureau, Federal Trade Commission, Attorney General's Office, New York State Banking Department, and others.

    If your legal advice is, "if anyone complains, just ghost," that is maybe another sign that you're doing it wrong?

  3. Again assuming simple interest as per footnote 1. And assuming they'd let him take 22 days to pay it back, which seems unlikely. The Consumer Financial Protection Bureau looked at overdraft fees a few weeks ago:

    Citing the report, Cordray said at the same briefing that “in lending terms,” a person who swiped a debit card, overdrew a checking account by $24, and covered it with a deposit three days later would pay a median overdraft fee of $34. That’s the equivalent of loan with an annual rate of 17,000 percent, Cordray said.

    I guess that's not criminal usury because Bank of America is a "licensed lender"? Who knows.

  4. One nice way to do that would be postal banking, but don't hold your breath.

  5. Sorry to pick on Bank of America; like the CFPB says, it's really like every big bank, and BofA has cleaned up its act since that settlement.

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To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net