Western Sky Financial, a South-Dakota-based online lender that's become infamous for its sky-high interest rates, is finally being sued.
New York State Attorney General Eric T. Schneiderman announced Tuesday that his office has filed a lawsuit against Western Sky for charging rates that far exceed what is permissible under New York law. According to the Schneiderman lenders not licensed by the state of New York can't charge an annual interest rate greater than 16 percent. Western Sky charges interest rates as high as 355 percent.
Yes, you read that right: 355 percent.
You may have seen Western Sky's TV commercials, which play up the company's Native American heritage (it has ties to South Dakota's Cheyenne River Sioux tribe) and tout the fact that you can get up to $10,000 in one day without collateral. But eagle-eyed viewers who actually read the fine print will have noticed the shocking cost of that easy money: "The APR for a typical loan of $10,000 is 89.68%, with 84 monthly payments of $743.99." Do the math, and you realize that borrowers who take the $10,000 wind up paying back $62,495.16 over the life of the loan.
And that's not even the most exorbitant interest rate charged by the company: the New York Attorney General's office points to a sample loan of $1,000 which requires repayment of nearly $4,000 in just two years -- a 255 percent interest rate. By way of comparison, even less attractive credit cards tend to charge between 15 percent and 20 percent.
The one thing to be said in Western Sky's defense is that it makes no great effort to conceal the high cost of its loans, a fact acknowledged by the Better Business Bureau. Still, there's an argument to be made that loans of this type are inherently predatory. Western Sky even suggests in its commercials that its loans are "enough to pay off your payday advances." In other words, it's targeting people who are already buried in high-interest debt.
What Western Sky offers these indebted consumers is time: Unlike most payday lenders, its loan periods range anywhere from one to seven years, which means you can get your short-term lenders off your back and pay off your debts over a far longer period. Unfortunately, the cost of this breathing room is that you're ultimately paying many times what you owed in the first place.
And unfortunately, desperate consumers are indeed taking on these loans.
"Since 2010, the companies have made at least 17,970 loans to New York consumers, lending more than $38 million in principal," says the Attorney General's office in its statement. "New York consumers owed more than $185 million on these loans in finance charges alone."
The lawsuit, which also names CashCall Inc. and its affiliate, WS Funding LLC -- the companies which actually provide the loans -- seeks to stop the companies from offering loans to New York residents. It also wants them to cancel any currently outstanding loans, and repay borrowers any interest and fees charged above the legal limits, as well as any other illegal charges.
In a statement obtained by Bloomberg, the company insisted that as a Native American-owned company, it's subject only to the laws and jurisdiction of its tribe. Curiously, its website also says that its loans aren't available to residents of 22 states, including New York -- a statement that seems at odds with the Attorney General's contention that it had made loans to nearly 18,000 New York state residents.
In its own statement, Western Sky describe the charges as "without merit."
It's not clear if we'll see similar lawsuit from other states, most of which don't have New York's tough criminal usury laws. But it's good to see some push-back from at least one state capital on behalf of desperate consumers who have been stuck with outrageously expensive loans.
Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.