New York City

I-Team: Despite Ban on Payday Lending, Public Pensions Profit from Outlawed Loans

Do as I say, not as I do.

That could be the message New York is sending as the state’s public pension funds invest millions in payday lending companies.

Short-term, high-interest debt known as payday loans are illegal inside New York borders. But that hasn’t stopped state and city retirement funds from investing more than $40 million in payday lenders that operate in other states.

“New York shouldn’t be spending a dime propping them up,” said Andy Morrison, a spokesman for the New Economy Project, a nonprofit that urges pension managers to make more socially responsible investments.

The New Economy Project is now asking New York City Comptroller Scott Stringer and New York State Comptroller Tom DiNapoli to initiate a process of divestment from payday lenders. But so far, neither comptroller has expressed enthusiasm for the idea.

DiNapoli declined to answer questions about divestment. His spokesman, Matthew Sweeney, said the blame for purchasing stock in payday lenders falls on “outside managers, who have discretion to purchase publicly traded stocks” on behalf of the state pension.

Jack Sterne, a spokesman for Stringer, said the office would review payday lending investments, but suggested it would be tricky to divest from the companies because those investments may be bundled with broad indexes that provide exposure to the entire stock market.

“Comptroller Stringer is against payday lending,” Sterne said. “Yet, as a fiduciary, we have a fundamental legal responsibility to protect the pension funds.”

Sterne added that payday lending companies represent a tiny fraction of the city’s pension portfolios – just one one-hundredth of one percent.

But advocates for divestment say the fact that payday lenders make up such a small slice of the investment pie should make it easier to shed the companies from pension portfolios without compromising the fiduciary duty to retired public employees.

This summer, Stringer and other pension trustees made the decision to liquidate roughly $48 million in stocks and bonds associated with private prison companies. A news release touting the decision said a risk analysis found that “divesting would add minimal or no risk to the Pension Funds’ portfolios.”

Despite that, Trustees on the Board of NYCERS, New York City’s largest public employee retirement fund, are so far not heeding the call to divest from payday lenders.

Public Advocate Latisha James told the I-Team: “Payday lending is not only predatory, but illegal in New York and is not a practice that I support in anyway.”

But James stopped short of calling for divestment, instead opting for a strategy of engagement.

“In the past, NYCERS has successfully engaged with companies to reform practices and policies when divestment was not immediately appropriate,” she said.

But advocates for divestment say it isn't possible to engage with payday lenders to make their loan products more ethical – because their profit relies almost solely on charging low-income workers extremely high interest rates.

"You can't say, on the one hand, we recognize this is awful. This harms communities of color. This is a predatory debt trap. And then on the other hand we want to invest in it and prop it up in other states where it's legal," Morrison said.

Henry Garrido, a NYCERS Trustee who is also Executive Director of the District Council 37 labor union, said he was unaware the retirement fund owns stock in payday lenders until the I-Team informed him. Though he stopped short of endorsing divestment, he is calling for an analysis to determine if divestment can be done without serious risk.

"I think we should go through the process of analyzing whether we should divest," Garrido said. "And the reason why I say that – I’m not just being politically correct – is that at times people think it’s just easy to extricate ourselves from a bad investment but even [in] that process you are also ripping apart a good investment and that may be hurting a portion of the community."

Mayor de Blasio, who appoints the NYCERS Chairman, did not respond when asked through a spokesperson if he endorses divestment from payday lenders.

The Community Financial Services Association, a trade group that represents payday lending companies, did not respond to the I-Team’s request for comment. But in the past, the organization has argued payday lenders provide critical access to credit – for people who don’t have bank accounts.

“While critics of the industry assign labels to payday advance customers in an attempt to further their political agenda, the fact is that CFSA members provide services to a broad cross section of America,” reads a passage on the CFSA website. “Increasingly, banks and credit unions are not serving the financial needs of communities.”

New York is one of fifteen states that effectively bans payday loans. The state caps interest rates on small, short-term loans at 25 percent. But in other states, payday loans can charge annual rates well into three digits.

Los Angeles resident Davina Esparza says two years ago she became unable to pay back a series of payday loans, some with annual interest rates higher than 300 percent. She says she defaulted on the debt, wrecking her credit – but not before paying about $10,000 in interest and fees on loans that totaled between $15,000 and $20,000. When she heard New York forbids payday loans within state borders, while allowing public pensions to invest in payday lenders that operate in other states, Esparza didn't hold back her criticism of pension managers.

"They should be ashamed of themselves for being hypocritical."

In the coming weeks, the Consumer Financial Protection Bureau is expected to release a set of new rules placing tougher restrictions on payday lending across the country. Payday lenders have argued federal regulators are drafting the rules without properly considering comments from borrowers who have benefited from payday loans.

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