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Taxi loan abuses part of a broader pattern in New York

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An investigation by The New York Times earlier this week suggested that the massive collapse in New York City taxi medallion prices since 2014 was not primarily the result of new competition from Uber and Lyft. Instead it was the inevitable outcome of unsustainable lending practices.

Low-paid cab drivers who dreamed of becoming their own bosses took out loans that required them to pay $1 million or more. The payments often covered only the interest that borrowers owed, and interest rates spiked if the loans were not repaid within a few years. From the lenders’ standpoint, the loans only made sense as long as medallion prices continued to rise.

Cabbies, many of them immigrants, suffered harsh consequences after taking out loans with terms they did not fully understand.

Since the articles were published, various politicians have floated potential responses that are narrowly targeted at taxi medallion lending.

New York City Mayor Bill de Blasio ordered a probe of taxi loan brokers. Other local officials suggested that the city should buy onerous loans at discounted prices and then forgive much of the debt.

Sen. Charles Schumer, D-N.Y., asked the National Credit Union Administration to conduct a review of supervisory practices at institutions that engage in taxi medallion lending.

But taxi drivers are not the only businesspeople who regularly get deceived by unscrupulous lenders. So do contractors, restaurateurs and the owners of various other kinds of struggling small businesses. Many high-cost business lenders are based in New York, where unusually favorable laws provide a haven to these companies.

Some aspects of the New York City taxi loan market were unique. For example, local officials had a vested interest in keep medallion prices high, since the city was generating revenue from the proceeds of sales. Indeed, the Times showed that government officials enabled lending that has put many borrowers in dire straits.

“The City of New York, more or less, is our partner,” Andrew Murstein, president of Medallion Financial, said in a 2011 interview.

But in other ways, the loans to cab drivers resembled deceptively marketed loans that have ensnared a wide variety of cash-strapped small-business owners.

Because the New York City taxi loans were classified as business loans, rather than consumer loans, they did not have to include standard disclosures regarding interest rates. They often included large fees and terms that unsophisticated borrowers did not understand.

And according to the Times, some taxi medallion lenders used a tool that under New York law offers a uniquely powerful way to collect on business debt. Lenders in the Empire State can require applicants for small-business loans to sign a document called a confession of judgment, which prevents them from contesting any subsequent allegation that they have fallen behind on their payments.

A Bloomberg News investigation last year found that merchant cash advance companies, which offer high-cost financing to small businesses across the country, have at times abused New York’s court system by forging documents and lying about how much money they are owed in order to obtain speedy judgments that cannot be contested by the borrower.

Small businesses that use merchant cash advances are required to make daily payments based on a percentage of their daily revenue. The merchant cash advance firms avoid complying with New York’s strict usury rules by classifying their financing not as a loan, but rather as a purchase of the company’s future credit card receipts.

The Bloomberg articles also chronicled the role of New York City marshals — mayoral appointees who enforce the court judgments, get a cut of the proceeds, and have been accused in some cases of improperly seeking to collect money outside of the city.

As evidence of business lending abuses in New York has mounted, little change has occurred at the state level, though there does appear to be a growing appetite for reform.

Last year, the New York State Department of Financial Services argued in a report that borrower protection laws and regulations should apply equally to all consumer lending and small-business lending activities.

The Bloomberg investigation reportedly sparked probes by the New York attorney general’s office and the Manhattan district attorney’s office. On Thursday, Bloomberg reported that the Federal Trade Commission has also opened an investigation of potentially unfair or deceptive practices in the merchant cash advance industry.

The loan practices that hurt taxi drivers are part of a broader pattern in New York, which has become the nation’s capital for predatory business lending. It remains to be seen whether state lawmakers and regulators will connect the dots.

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