Last week, a New York state agency sued two payday lenders for targeting minority and military communities with short-term, high-cost loans that sometimes charge as much as 700 percent in annualized interest.  Preying on low-income individuals who may need quick cash to make ends meet, these companies offer loans against anticipated paychecks or tax refunds with rates so high that borrowers can sometimes end up in the hole after they’ve paid the interest and other fees.  While advocates have long attacked these loans as predatory, this suit marks the first time state law enforcers have sought to curb the practice through anti-discrimination laws.

In its complaints (available here and here), New York’s Division of Human Rights points out that these loans can thrust borrowers into a cycle of debt and undermine public policies underlying tax credits such as the earned income and child tax credits.  In the 2004 tax season, such loans drained $1.8 million daily from low-income people in New York alone.

To support its anti-discrimination claim, the agency cites evidence documented by the Department of Defense, the Center for Responsible Lending, and the Consumer Federation of America that these loans not only have a discriminatory impact on, but also are targeted toward, people of color and military families (which are also a protected class under NY’s anti-discrimination law).  For example, the DoD found that such lenders target military personnel through proximity and prevalence around military installations and through affinity marketing techniques.  The Center for Responsible Lending found that African-American neighborhoods in North Carolina have three times as many payday lenders per capita as white neighborhoods, even when you control for income, unemployment, age, education, and other relevant characteristics.  The NY agency’s own 10-month investigation also revealed discriminatory targeting.

By targeting these protected communities with abusive loan products, the Division of Human Rights argues, these lenders violate state anti-discrimination laws.

Kudos to New York for recognizing the disparate impact these abuses have on minority communities and for taking an innovative approach to ending these harmful lending practices.  Let’s hope lawmakers soon follow their lead and enact measures that will halt these practices for good, whether discriminatory or not.