41 posts categorized "Underbanked/Fringe Banking"

New Study Tells Inside Story of how Local Communities use Ordinances to say ‘Enough’ to Payday Lenders

posted by Nathalie Martin

Robert Mayer of the University of Utah and I just finished an 18-month study of community approaches to controlling payday lending . The study concludes with ten lessons communities can use to pass similar ordinances on any subject matter. In The Power of Community Action: Anti-Payday Loan Ordinances in Three Metropolitan Areas, we document how local communities positively organize to control payday lending in their jurisdictions and thereby create important legal change. Our whole report as well as an executive summery can be found  here

We hope this study will galvanize local communities and show them how they can make a difference in changing the law and society as a whole, Payday loans, which are borrowed against future paychecks and can carry interest rates of 400 percent or more, often strip wealth from society’s most economically vulnerable individuals and communities. These loan outlets now outnumber all McDonald’s, Burger King, Starbucks and Walgreens stores combined. In states where legislative controls are weak — and in the absence of federal regulations — some local governments have stepped forward to address the problems caused by high-cost, predatory payday loans.The researchers traveled to three regions — Silicon Valley in Northern California; Greater Metropolitan Dallas in Texas; and Greater Salt Lake City in Utah — to see how local entities have produced numerous ordinances aimed at halting the spread of payday lending. The locations were chosen for their diverse demographic, cultural, political and legal characteristics.

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Auto Title Lending: Exploding Toasters

posted by Adam Levitin

The CFPB has a new report out on auto title lending, and the findings are jaw-dropping. If ever there was a consumer financial product that looks like an exploding toaster, it is an auto title loan.  Default rates on auto title loans are one in three, with one in five resulting in a repossession. Is there any consumer product that is tolerated when one out of three products blows up? Even one in five? 

There's a lot of good data in the report (which assiduously avoids any interpretation, but just presents the facts), but beyond the default rates, here's what really jumps out at me: over 80% of the loans roll over and around half result in sequences of 10 or more loans.  That means that rather than viewing auto title loans as short term products with an extension option, they are really used more like longer-term products with a prepayment option. But more importantly, it tells us something about how to interpret default rates.  

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The Promise and Limits of Postal Banking

posted by Adam Levitin

It’s easy for Progressives to get excited about the idea of postal banking: a public option for banking! What’s not to love?

I’m glad to see the idea of public options in financial services getting some play of late; it’s something I’ve championed for a while in payments and housing finance. But I think it’s necessary to recognize some of the limits to postal banking. In particular, it's not at all clear to me why we would want to involve the Post Office in the public provision of financial services. What the Post Office offers is a way to recreate a brick-and-mortar branch bank network. This really doesn't make a lot of sense for 21st century banking. Additionally, postal banking is often pitched as an alternative to payday and title lenders. Before we go running down that path, we should think about what it means to have the government in the payday lending business.

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It Is Very Expensive To Be Poor

posted by Pamela Foohey

How BanksCash checking fees, prepaid card fees, money transfer fees, cashier's check fees -- all together, the unbanked pay up to 10% of their income simply to use their own money. And when lower-income people face an emergency, they must turn to expensive payday loans, title loans, and tax refund loans. As Mehrsa Baradaran (University of Georgia) writes in her new book, How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, "indeed, it is very expensive to be poor."

How did this happen? And how might we begin to solve the problem? In her book, Baradaran details how banks and government are and always have been inextricably tied, with the government helping banks and the banks supposedly helping the public in return. But this "social contract" has eroded. The banking sector has turned away from less profitable markets, leaving people with small sums of money to deposit without a trustworthy place to stash their cash, and people in need of small sums of money to borrow nowhere to turn but fringe lenders. Moreover, these people understandably often are uncomfortable dealing with large banks. And the result is that an astonishing large chunk of the American population is unbanked or underbanked.

If the unbanked and underbanked had a trustworthy place to deposit their cash, some of the fees they pay simply to use their money would go away. This alone might allow families to stay financially afloat. Likewise, if they had the option to borrow small sums of money at reasonable rates, temporary financial emergencies may not set so many families up for a lifetime of financial failure. Which leads Baradaran to a proposal that I’m fond of (indeed, I’ve blogged about Baradaran’s thoughts on it before): postal banking.

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Churches as an Alternative to Payday Lenders

posted by Pamela Foohey

Payday loans are exceedingly expensive, often trapping borrowers into a cycle of rolling their loan over for many months while interest compounds. Postal banking has been suggested as a way to provide people with better access to less-expensive loans. And the CFPB has indicated that it intends to regulate payday and similar high-cost loans (maybe that will happen soon?). In the meantime, some churches apparently have taken matters into their own hands.

A recent Washington Post article describes how churches in Virginia have helped some of their members secure manageable loans from the Jubilee Assistance Fund (very apt name) and the Virginia United Methodist Credit Union. ("Faith-based" credit unions exist across the country and also offer loans to churches. A few of these credit unions end up as creditors in churches' Chapter 11 cases). The article reports that similar church-run lending programs are sprinkled across the country, with churches in some states seemingly having more coordinated efforts.

In the face of the payday industry, these programs undoubtedly are a blessing to the lucky church members who are able to obtain loans. The existence of these programs--and the interesting personal stories in the article--perhaps show how crucial regulation of the high-cost lending industry is, as well as indicate how desperately many people want and would benefit from access to lower-cost lending options.

Prepaid Card Use on the Rise Among Unbanked and Underbanked

posted by Pamela Foohey

Prepaid CardLast week, the FDIC released its 2013 National Survey of Unbanked and Underbanked Households. Some of the Survey's results were similar to the FDIC's 2009 and 2011 surveys. 7.7% of households were unbanked. Another 20% of households were underbanked. I took note of the Survey because its maps of unbanked and underbanked rates by state have been receiving some attention online. But what I think is more intriguing are the Survey's questions about prepaid cards.

General purpose reloadable prepaid cards, though still a small segment of the consumer financial
products market, have grown rapidly in past years -- from $28.6 billion in 2009 to close to $65 billion in 2012 (as previously discussed). Consistent with this growth in dollars, the Survey found that prepaid card use had increased among all households from 2009 to 2013 -- from 9.9% to 12%. More interestingly, the share of unbanked households that used prepaid cards had increased more dramatically -- from 12.2% in 2009 to 17.8% in 2011 to 27.1% in 2013. By comparison, 19.6% of underbanked households and 8.8% of fully banked households had used prepaid cards in 2013. When combined, unbanked and underbanked households comprised the majority (55%) of prepaid card users in the previous 12 months.

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Local and State Treasurers Can Build Wealth in Struggling Communities

posted by Nathalie Martin

Sometimes you can beat the door down with efforts to get Federal and State officials to tackle problems, but at the end of the day, locals can best get the job done, quietly and quickly. A story in Monday’s New York Times bears this out.  For example, San Francisco City Treasure Jose Cisneros noticed that families who finally took advantage the of the earned income credit, the country’s largest public benefit program, often had no bank accounts in which to deposit their refunds. This meant losing a portion of this important public benefit to check cashers and others.

Because of this problem, Treasurer Cisneros started a program called Bank On, that helps people on the financial fringes open bank accounts and develop credit histories. This model has spread across the country, leading the Treasury Department to conclude that Bank On has “great potential” to “create a nationwide initiative that attends to the needs of underserved families and works to eradicate financial instability throughout the country.” In 2010, Mr. Cisneros also started Kindergarten to College, a program that automatically opened a bank account with $50 ($100 for low-income families) for every kindergartner in public schools. The city pays for the administration and initial deposits, while corporate, foundation and private donations provide matching money to encourage families to save more. His office even figured out how to open bank accounts for thousands of children without social security numbers.

These and similar effort have now been replicated in more than 100 cities, showing that even mundane public races might make a big difference in the health and well-being of citizens, if not the entire U.S. economy.

Is a 36% Cap Radical?

posted by Nathalie Martin

I was pleased to see today’s New York Times editorial entitled “A Rate Cap for All Consumer Loans.”  It created a very public description of an industry indiscretion involving loaning money to the military at over 36%. Those loans are illegal because a federal law makes it so, a law that passed with broad and deep bipartisan support because trapping military personnel in high-cost loans interferes with military readiness and thus threatens national security. This editorial, not in some fringe publication, but rather the New York Times, argues that we all deserve the same protections from high cost loans.  I agree (in this recent article), and think the time is right to start listening to people and not industry on this topic.

Is a federal 36% cap radical? Historically, 36% would seem heinously high. Plus, if 36% is radical, why does much of the U.S.‘s eastern seaboard's state law forbid consumer loans with interest rates of over 36%? Are these radical states? The public favors a hard cap, over and over again in every study,  regardless of politics. Hearing politicians support consumer loans with 500% or even 1,000% interest, is so mysterious it makes me want to look at their list of campaign contributors.  Remember, real people over political contributions. We elect politicians and pay their salaries. In turn, they speak for us. Do you like what they are saying?

Online Payday Loans Cost More Than Storefront Payday Loans And Customers Are Harassed More Egregiously

posted by Pamela Foohey

Over the last couple years, The Pew Charitable Trusts has put together a useful series of reports regarding payday lending in the United States. The fourth installment was released on October 2. Its title is quite descriptive: "Fraud and Abuse Online: Harmful Practices in Internet Payday Lending". The report documents aggressive and illegal actions taken by online payday lenders, most prominently those lenders that are not regulated by all states: harassment, threats, unauthorized dissemination of personal information and accessing of checking accounts, and automated payments that do not reduce principal loan amounts, thereby initiating an automatic renewal of the loan(!). Storefront lenders engage in some of the same tactics, but online lenders' transgressions seem to be more egregious and more frequent.

Putting these disturbing actions aside, are consumers getting a better deal online than at storefronts? Given the lower operating costs, it is logical to assume that these exorbitantly expensive loans might be just that much less expensive if purchased online? Nope. Lump-sum loans obtained online typically cost $25 per $100 borrowed, for an approximate APR of 650%. The national average APR of a store-front lump-sum loan is 391%. Why the disparity on price and severity of collection efforts?

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New Case Holding High-Cost Loans Unconscionable and a Payday Loan Video

posted by Nathalie Martin

 A little bit of payday loan news for our readers. First, the New Mexico Supreme Court has held that 1100% high cost installment loans (the payday loan substitute in states where payday loans are illegal) are unconscionable.

Also, did you see John Oliver’s bit on payday loans this weekend? Take a look.  It even features Sarah Silversman. Warning: There is some bad language in the video.

Operation Choke Point Hysteria: Are Choke Point's Critics Responsible for the Account Closings?

posted by Adam Levitin

At today's House Judiciary Committee hearing on Operation Choke Point it seemed that Choke Point's critics are conflating a fairly narrow DOJ civil investigation with separate general guidance given by prudential regulators.  In particular, Rep. Issa attempted to tie them together by noting that the DOJ referenced such guidance in its Choke Point subpoenas, but that's quite different than actually bringing a civil action on such a basis (or on the basis of "reputational risk"), which the DOJ has not done.  

There is a serious issue regarding the bank regulators' use of "guidance" to set policy. Guidance is usually informal and formally non-binding, but woe to the bank that does not comply--regulators have a lot of off-the-radar ways to make a bank's life miserable.  This isn't a Choke Point issue--this is a general problem that prudential bank regulation just doesn't fit within the administrative law paradigm.  There are lots of reasons it doesn't and perhaps shouldn't, but when it is discovered by people from outside of the banking world, it seems quite shocking, even though this is how bank regulation has always been done in living memory:  a small amount of formal rule-making and a lot of informal regulatory guidance.  By the same token, however, compliance with informal guidance is enforced informally, through the supervisory process, not through civil actions, precisely because the informal guidance is not actionable.  Yet, that is what Choke Point critics contend is being done--that DOJ is using civil actions to enforce informal guidance.  

I don't think that's correct (or at least it hasn't been shown).  But the conflation of DOJ action with prudential regulatory guidance may be creating the very problem Choke Point's critics fear.  

Bank compliance officers may be hearing what Choke Point critics are saying and believing it and acting on it.  If compliance officers believe that the DOJ will come after any bank that serves the high-risk industries identified by the FDIC or FinCEN, not just those that knowingly facilitate or wilfully ignore fraud, they will respond accordingly.  The safe thing to do in the compliance world is to follow the herd and avoid risks.  The attack on Operation Choke Point may well have spooked banks' compliance officers, who'd aren't going to parse through the technical distinctions involved.  

What matters is not what the DOJ actually does, but what compliance officers think the DOJ is doing, and they're likely to head the loudest voice in the room, that of Choke Point's critics.  So to the extent that we are having account terminations increasing after word got out of Operation Choke Point it might be because of Choke Point's critics' conflation of a narrowly tailored civil investigation with broad prudential guidance.  Ironically, we may have a self-fulfilling hysteria whipped up by Choke Point critics, who shoot first and ask questions later.  

Being Unbanked, Part 1

posted by Katie Porter

Note from Katie Porter: This guest post is from Jennifer Song, senior staff attorney at the California Monitor Program. Jennifer pitched in and attended this workshop, and I hope Credit Slips readers will enjoy hearing about her experiences in a short series of posts. 

Last week, I, Jennifer Song, had the opportunity to join FinX/LA 2014:  Connecting to the Consumer Financial Experience.  Hosted by the Center for Financial Services Innovation as part of their three-day conference on consumer financial services,  FinX was an “in-the-field activity” that promised to give participants a “deeper understanding of the complexity of consumers’ financial lives in accessing financial services.” 

Upon arriving at the conference, we were placed into groups of four and given worksheets. The tasks to complete included cashing a personal check, cashing a pay check, purchasing a general purpose reloadable card and reloading the card, purchasing a money order, inquiring about auto title loans, etc.  We were given a little over two hours to complete these tasks in lower income areas throughout Los Angeles. With only a quick slideshow of interesting facts and a pep talk, we set off on our journey. 

While I will share my experience and how it shaped my thinking on low-income banking, I want to start by identifying factors that may have prevented me from fully experiencing and understanding the challenges facing the under banked and unbanked. PhotoFirst, we were traveled in groups of four; most people using these services do not travel in packs or with an entourage, and are not able to consult each other about transactions.  Second, while we were told to “dress down” in order to “blend in” while performing these transactions, I do not believe we were fooling anyone at the shops we visited.  Third, and perhaps the most glaring contrast, was that we were chauffeured around Los Angeles in a town car to perform these transactions. While I assume there is access to public transportation in or around these financial centers, Los Angeles is notorious for being difficult to navigate via the public transportation system (did you even know it has a subway?) Many of the financial centers were clustered together but major banking institutions were noticeably absent in these areas. 

Continue reading "Being Unbanked, Part 1" »

I am Approved for a Payday Loan

posted by Pamela Foohey

Received the automated call to my cell phone yesterday morning, whereupon my phone recorded a 45 second message. Not only am I approved for a payday loan in the amount of up to $1,500, I apparently previously applied for a payday loan, and given that "as of April 2014, our lenders have lowered their requirements for loan qualification, I am now approved" (emphasis added). (I did not apply for a payday loan, ever, for the record.) All I need to do is go to this handy website and enter my pre-approval/promo code, which was provided to me twice during the call. The call ended by assuring me that there were no hidden fees to get my loan and congratulating me again.

The unsolicited call was very timely in light of my previous post hypothesizing that payday lenders will venture even more into the Internet arena in the near future. I wonder how this lending network got my cell number (someone sold it to them? data breach?), and how they decided my number belonged to a person from whom it would be productive to solicit business. As they transition to more Internet lending, maybe payday lenders are really widening their targeting? In fact, I received a call a few months ago from a live person asking me if I wanted to consolidate my payday loans. (How many payday loans does the industry think I have?) I replied, "that sounds interesting, tell me more about this consolidation thing." To which the caller questioned, rather sternly, "do you have any payday loans?" Upon hearing that I have none, the caller promptly hung up. Based on my completely anecdotal experiences, the world of payday lending is getting larger and larger.

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Will 2014 Be the Year the Bureau Takes on Payday Lending? If So, What Data Will They Use in Regulating?

posted by Nathalie Martin

 To question number one, it looks that way. According to Kim Chapman and Carter Dougherty at Bloomberg, as well as other news outlets, Director Richard Cordray has announced his intention to move forward with regulations aimed at lenders that make small loans like payday loans, title loans, and installment loans with triple digit interest rates.  The question of course is what this “oversight” and “regulation” will look like. Will the rules look something like those in Colorado, which still permits loans of up to 200% in some cases? See Pew report on this issue. Will the new regulations deem certain practices of lenders unfair and deceptive?  Will regulation of online lenders be included? What empirical data will be considered in devising these regulations? Hopefully not that found in a paper I recently read on the Online Lenders Alliance website, entitled Assessing the Optimism of Payday Loan Borrowers.

The punch line of this study is that most payday loan borrowers expect to repay their loan on its due date and not borrow again.  Indeed, most of the borrowers in the survey did just that. Paid it back quickly.  The majority of the paper’s sample population of payday loan borrowers expected to repay the loan on its due date and not borrow again.  Only 40 percent expected to have the loan out for more than one pay period, and the mean duration of indebtedness that those borrowers expected was 36 days.  Interesting. 

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CFPB What Have You Done for Me Lately? The Cash America Case, For One Thing

posted by Nathalie Martin

The CFPB just settled an enormous enforcement action against payday lender Cash America. Under the settlement, Cash America will pay $5 million in penalties and $14 million in refunds to overcharged customers. The CFPB found that Cash America or its affiliates robo-signed documents in debt collection lawsuits, made loans to military servicemen in violation of the federal Military Lending Act, and even destroyed documents during discovery. 

My student Andrew Anders is writing a paper about the other enforcement actions the CFPB has been bringing. As most of you know, the Dodd-Frank Act gives the CFPB various enforcement powers including the authority to engage in administrative enforcement actions (typically followed by a consent order) and to bring civil litigation proceedings. The CFPB is required to report all public enforcement actions to which it is a party, which is where Andy got his data, all from 2012.

During the time period of January 1, 2012 through December 31, 2012, the CFPB was involved in nine public enforcement actions. Of these actions, five were administrative actions and four were

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Military Lending Act Has Loopholes Says NY Times Dealbook

posted by Nathalie Martin

Just as I was getting ready to roll out an article agreeing with Creola Johnson and explaining why Congress should implement a 36% cap, like the Military Lending Act, for all of us, the Dealbook rolled out this story.  As it turns out, the Military Lending Act is not stopping payday-style lending to the military after all.

Alarmed that payday lenders were preying on military members, Congress in 2006 passed the law, which was intended to shield servicemen and women from the loans tied to a borrower’s next paycheck. These loans carry double-digit or triple-digit interest rates and plunge customers into debt. Now, seven years since the Military Lending Act came into effect, government authorities say the law has gaps that threaten to leave hundreds of thousands of service members across the country vulnerable to potentially predatory loans — from credit pitched by retailers to pay for electronics or furniture, to auto-title loans to payday-style loans. The law, the authorities say, has not kept pace with high-interest lenders that focus on servicemen and women, both online and near bases.
The short-term loans not covered under the law’s interest rate cap of 36 percent include loans for more than $2,000, loans that last for more than 91 days and auto-title loans with terms longer than 181 days.

Lenders who specialize in ripping off military personnel have official sounding names like Military Financial, Just Military Loans, and Patriot Loans. They like lending to the military because they get paid from the military allotment, which virtually assures payment.  Moreover, soldiers have to stay in good financial shape in order to maintain their security clearance, which means lenders have maximum leverage over their borrowers.  One lenders web site claims “We know the military because we are former military,” Lenders also lure customers by offering $25 Starbucks gift cards for referrals and throw parties with free  food.

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A Few Things to Consider Before Federal or State Regulators Cave to Requests of Tribal Lenders to Back Off

posted by Nathalie Martin

Carter Dougherty added last week to the many recent articles (here and here) on regulators who are cracking down on internet lending, both state and federal. First, the Justice Department has been asking banks to cut ties to online lenders whom regulators suspect of shady business practices. Various governmental entities have even issued subpoenas to banks and other companies that handle payments for an array of financial offerings, ramping up an investigation that has been under way for several months, according to Justice Department officials. New York state is also cracking down. New York has even filed suit, alleging that lenders, including television advertiser Western Skies, were charging consumers ten times what New York State law allows.   

Last week though, Mr. Dougherty reported that an association of online lenders claiming to be operated by Native American tribes, The Native American Financial Services Association (NAFA)(which represents just 16 of the 566 federally-recognized Indian tribes in the U.S.) called on banks to resist pressure from the state of New York State to cut them off from the nation’s primary payment system, claiming violations of tribal sovereign immunity. 

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Payday, Title, and Installment Lenders Show Signs of Strain

posted by Nathalie Martin

Given the many ways in which payday lenders have been able to transform themselves  into title lenders and installment lenders, and to otherwise avoid state law,  l try not to get too optimistic that high-cost lending practices  will be curbed. Yet I feel a bit hopeful after reading Paul Kiel’s recent ProPublica article  The Payday Playbook: How High Cost Lenders Fight to Stay Legal.

In this piece,  Kiel continutes his superb coverage of these products by chronicling the citizen’s ballot initiative undertaken by  Missouri consumers once they realized that their legislature was “bought and paid for” and would not be outlawing high-cost credit in Missouri. According to this article, citizens leading and participating in the ballot initiative, which included many religious organizations and non-profits, were tracked down, sworn at and yelled at by employees of  Missourians for Equal Credit Opportunity (“MECO”), a non-profit formed by the high-cost credit industry. And that is not the half of it. Clergy organizing the ballot initiative (many from African- American churches) received a “legal notice” in the mail from  MECO, threatening criminal sanctions for “the collection of signatures for an initiative petition.” Say what? Then MECO filed a lawsuit to try to stop the organizers from collecting signatures for the ballot initiative, under grounds that were, well, groundless.  As many of you know, ballot initiatives have been used in many states to eradicate payday lending, among hundreds of other purposes. Finally, MECO ran television ads featuring clandestine figures in dark suits instructing voters that “if someone asks you to sign a voter petition, just decline to sign.” When none of this seemed certain to kill the ballot initiative, 5,000 ballots were stolen out of one organizer’s car.

When did the usual efforts of transforming loans (from payday to title or installment) and lenders (from payday lender to CSO to tribe to off-shore) become not enough to survive? Am I the only one catching a whiff of desperation here?

 

Interesting Automatic Stay Decision in FastBucks Chapter 11 Case

posted by Nathalie Martin

Readers might recall that back in November, I blogged about a case in which the unconscionability doctrine was used to invalidate one lender’s entire book of payday and installment loans. The post described how the court found that FastBucks employees encouraged borrows to not pay off loans, which loans were found to violate state law. We in New Mexico, where the case was brought, watched to see if the FaskBucks shops would close down, but they never did. Rather, Fastbucks filed some motions and an appeal in state court, then filed for Chapter 11 on December 10, 2012. Their largest creditor? The State of New Mexico.

FastBucks removed the New Mexico lawsuit to federal court, to be heard as part of its bankruptcy case. FastBucks also filed an adversary proceeding seeking to recover for violation of the stay and to enjoin the New Mexico Attorney General’s Office (the plaintiff in the suit) from:

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Usury and the Loan Shark Myth

posted by Lauren Willis

Consumer financial education, disclosure, and defaults all dispensed with in my prior posts, shall we move on to “substantive” regulation, dare I even say “usury”? Before we do that, I need to clear up another myth that, like the belief in the efficacy of consumer financial education, is deeply ingrained: the loan shark myth.

Forthcoming in the Washington & Lee Law Review is a historical expose of the relationship – or lack thereof – between credit price regulation in the small loan market and loan sharking. The author, political scientist Robert Mayer, finds that what the popular culture has called loan sharking consists of two different types: violent and nonviolent. Both have been characterized by: (1) high prices, in excess of usury restrictions where such restrictions have applied, and (2) short-term, nonamortizing loans made to people who have a decent likelihood of being able to pay the interest amount due at maturity but a low likelihood of being able to pay off the principal balance, resulting in a steady stream of interest income to the lender as the loans roll over and over. It is this second feature that in the 19th Century first earned even nonviolent loan sharks their “shark” moniker – a single loan, even if it is expensive, looks harmless enough, but stealthily traps the borrower in a cycle of debt.

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The Behavioral Economics of Title Lending

posted by Paige Marta Skiba

Shutterstock_52608853 copyThis week we have discussed some of the interesting facts our recent research has uncovered about the title lending industry and its borrowers. One of the goals of our research is to use economics tools, from both neo-classical and behavioral economics, to develop a broader understanding of how borrowers are making choices in this market.

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Title Lending’s Big Question: Dude, Where's My Car?

posted by Paige Marta Skiba


Shutterstock_110276351In a new paper on title lending with Katie Fritzdixon and Jim Hawkins, we report data from a survey of over 400 title lending customers across three states. To introduce this work, we wanted to start off by talking about the important issues that title lending raises. The biggest question, by far, is how many title borrowers end up losing their car?

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Pawnbroking: The Hot New (Ancient) Credit Market

posted by Paige Marta Skiba

Thanks for having me back at Credit Slips! This week I’ll be blogging about two forms of credit that are increasingly popular: auto title lending and pawnshops.

Pawnbroking is back, and in a big way. Recent television shows like Pawn Stars and Hardcore Pawn are a testament to the resurging interest in this ancient form of lending. In a new paper with Susan Payne Carter and Marieke Bos, "The Pawn Industry and Its Customers: The United States and Europe,"we document important facts about the pawn business. Pawnbrokers take collateral or a “pledge,” (anything from jewelry to tools to dental implants!) in exchange for about 50 percent of the item’s resale value, plus interest.

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State Payday Lending News Part II: Oregon Warns Tribal Payday Lenders to Back Off

posted by Nathalie Martin

A little something more to chew on while you are chewing off your fingernails over tonight’s election news. As reported on Turtle Talk this morning, Oregon and Washington are none too pleased about tribal payday lenders making loans to citizens of their state, in contravention of their state usury laws. Online tribal payday lenders are setting up shop on Native land in order to get the benefits of sovereign immunity, as Josh Schwartz and I wrote about in our Washington and Lee Law Review article.

According to a story posted on a Portland Oregon tv web site, tribal loans are now at the center of a legal battle at the highest levels of the U.S. Government. An Oregon senator is now trying to push a bill that he authored through the U.S. Senate, which would provide that lenders may not operate out of a tribal reservation or overseas, or anywhere else, if the resulting loans violate of state laws. If this federal bill became law, the Consumer Fraud Protection Bureau would have the power to stop the lending.The turtle talk post also linked to a warning to consumers posted by the Oregon Division of Finance and Corporate Securities. This link contains a partial list of the tribal payday lenders.

State Payday Lending News Part I: New Mexico Court Finds FastBucks Loans to be Unconscionable

posted by Nathalie Martin

A little something to chew on while you are chewing off your fingernails over tonight’s election news. The New Mexico Attorney General’s office has sued Fastbucks for providing unconscionable loans to New Mexico citizens, both under the common law unconscionability doctrine and the state’s Unfair Practices Act’s unconscionability provision. Read the short, pithy opinion Download Fastbucks decision.

The court’s opinion, karmatically handed down on Yom Kippur 2012, found that FastBuck steered borrowers into loans that subjected them to higher interest rates and kept them locked into recurring cycles of debt, that the FastBucks entities were experts in the loan products they created, and that these experts demonstrated their superior knowledge of these alternative loan products through their explicit actions to maneuver around the regulation of payday loans.  The court also found that defendants provided incentives to their representatives for steering borrowers into the more expensive installment loan products and away from less expensive loan products, and for promoting and prolonging recurring inescapable indebtedness.

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Brains for Hire

posted by Melissa Jacoby

Posting again on fiction so soon? Not the original intention, but I recently read a story that skirts around the substantive core of Credit Slips, as well as the fabulous work of sociologist Viviana Zelizer, a past Credit Slips guest. Blame or gratitude can be sent c.o.d. to Charles Yu, a lawyer when he is not writing things like Standard Loneliness Package (also in Yu's recently published collection). The thirty-nine year old narrator receives 12/hour to absorb the pain and bad feelings from wealthy customers who pay 100, 200, 2,000/hour to be devoid of such pain and bad feelings. The price varies for watching a loved one die, a funeral, surgeries, root canal, breakups, firings, quittings, nose dives in the stock market (priced higher than some deaths). The company will not quote a price for death of a child.

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The Gender Divide in Payday Lending

posted by Amy Schmitz

Nathalie Martin has done great work and has posted comments on Creditslips.org regarding payday lending. I also have been interested in how these payday loans prey on consumers with the least resources and power, and have helped consumers with related issues through my outreach work. At the same time, I have had the privilege to have students like Adria Robinson, who take great interest in these consumer issues. Adria Robinson is so passionate about consumer issues that she volunteered to work with me in gathering the latest data on Colorado's payday lending post-passage of its new payday regulations in August of 2010. Thanks to Adria for her help with this post!

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Is Loaning Money at a 350% APR Evil?

posted by Bob Lawless

In the early part of this year, a new start-up called ZestCash launched. Founded by former Google CIO, Douglas Merrill, it appears to be an attempt at short-term consumer lending with a Google-like "don't be evil" approach and markets itself as an alternative to payday loans.The venture caught my eye when mentioned in the New York Times this weekend as part of a story about Gil Ebaz's work of adding value to different services by providing better, more reliable data.

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Credit for Parenthood (in the Wall Street Journal)

posted by Melissa Jacoby

Wall Street Journal Reporter Jessica Silver-Greenberg casts a spotlight on the market for fertility treatment loans - including loans that enable the purchase of other women's eggs  - in the article "In Vitro a Fertile Niche for Lenders."  (subscription required). Perhaps this will prompt some coverage of the adoption loan market, which also has very interesting not-for-profit lending options; the direct financial price of the credit may be low but some complicated strings are attached. My earlier efforts to broadly evaluate the impact of loans in these markets are here and here

Buy Here Pay Here Dealerships

posted by Katie Porter

The LA Times did a three-part series this fall on what they call "Buy Here Pay Here" car dealerships. (Here is Part One, Part Two, and Part Three). The name, which was new to me, comes from a common requirement that customers return to the lot to make their loan payments. The high-interest-rate loans are usually for aging, high-mileage vehicles to people with ragged credit. The idea of the "pay here" is to provide ample opportunity for dealers to keep track of the car's--and customer's--whereabouts and to increase the likelihood of repayment by customers.

One year ago (almost to the day), Credit Slips discussed the repossession rates for auto title loans. Unlike buy here/pay here, auto title loans are not to purchase a car but require a person to pledge their car's ownership if a loan is not paid back. Adam Levitin came up with an estimated rate of 14-18% for repossession on auto title loans but emphasized how difficult it was to get such data. Surprisingly to me, the LA Times managed to get the buy here/pay here industry to not just share--but to gloat--about how this business model works. The key data: 1)  About 1 in 4 buyers default. 2) The dealerships make an average profit of 38% on each sale, more than double the profit margin of conventional retail car chains.

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Occupy Wall Street, "Fringe Banking" and Public Options

posted by Adam Levitin

I happened to walk by Zuccoti Park in Manhattan yesterday, where the Occupy Wall Street protest is centered. I picked up a few pieces of protester literature. I can't say that I was in any way comprehensive in my collection. Some of the literature was just nuts, e.g., a flier blathering about admiralty law usurping the common law and the Trading with the Enemies Act. This flier could just as easily have been found at a Tea Party gathering. It gave new meaning to the term "fringe banking." 

But I also picked up a thoughtful and intelligent, for example a flier about public banking and the Bank of North Dakota (the only state-owned bank in the United States).  Hmmm.  That sounds like a public option for banking. If the financial system is broken, maybe it needs some better competition. It's not such a crazy idea. We actually already do that quite a bit in the mortgage market-FHA, VA, RHS, Ginnie Mae, and historically the FHLBs, HOLC and Fannie Mae (Susan Wachter and I have a forthcoming book chapter on this, to be posted to SSRN soon). We've even done it in straight banking--most people forget that we used to have a U.S. Post Office Bank. We have an FDIC that used to compete with private bank insurance funds (see the opening chapters of Kathleen Day's S&L Hell for a description of the private Maryland S&L insurance fund that failed). And we have federal (public) currency that used to compete with and has now supplanted private bank notes.  My point here is not to endorse public options or not, but merely to note that historically they were a response to failed private markets and should be part of the policy discussion. 

Minnesota Attorney General Sues 5 Internet Payday Lenders for Automatically Extending Loans

posted by Nathalie Martin

The five lenders, Flobridge Group LLC, Silver Leaf Management and Upfront Payday, all of Utah; and Integrity Advance and Sure Advance LLC,  were each sued separately for violating Minnesota’s small loan laws.  The total U.S. market for Internet payday loans is estimated at $10.8 billion. These suits allege various violations, including automatic extensions of the loans and rolling the loans over by paying off an old loan with proceeds from a new one, as well as a failure to be licensed in the state.   The reporter who wrote this story  tried to call one lender and got a  voicemail system that kept looping back through the list of options after pressing "0" for "all other inquires." One of the options included pressing 3 "if you would like to extend your loan for another two weeks." A customer-service representative at Sure Advance LLC of Delaware asked for an inquiry to be sent to an email address. No response had arrived by late Tuesday.

Phone calls to one borrower, Diane Briseno's, home in Maplewood came from India, the Minnesota attorney general's office discovered. Her caller ID showed the call was from the State of Minnesota. Briseno's son, 20, had started applying for a loan online but never completed the form. Regardless, he had left enough information that the phone calls started almost immediately. When Briseno called back to a toll-free number, she was told her son had taken out a $700 loan and needed to pay $6,000 immediately.

Is it That Hard to Find a Good Payday Loan? One Woman Paid $900 in Undisclosed Fees

posted by Nathalie Martin

Following our prison visit in clinic this past week, we promised to report on a brand new (to us) scam, one involving a company that helps people “find” payday lenders. My student Bridget Mullins reports on it here.

One woman I saw at the prison had a question about a predatory lending scheme (if you can call it lending really) that I had never heard of before. She told me that she was looking for a payday loan so she went to a website that offered to find her a good payday loan. At some point she was asked to enter in her bank account info, but she didn’t read the fine print and she didn’t understand that they were actually charging her for this “service.” She never got a payday loan from this company, and it ended up costing her $900 in overdraft fees at her bank.  We have no idea how much the finder charged or how many times they ran these unauthorized fees through, so we tried to find out what might've happened.

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Call for Papers on Regulation in the Fringe Economy

posted by Nathalie Martin

Jim Hawkins, Jean Braucher and I, put together a symposuim proposal on frindge banking products, and we were very fortunate to have Washington and Lee School of Law (home of the illustrous Professor Margaret Howard) accept our proposal. As a result, the law school is now making the follwing call for papers. 

The symposium Regulation in the Fringe Economy will be the most significant attempt to date by legal scholars to address the vexing legal and social issues created by lenders on the fringes of the economy who offer payday, auto title, for-profit college, and refund anticipation loans. A complete list of confirmed participants and their paper topics is available at the conference website: http://law.wlu.edu/fringe.

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RALs - Will They Become Extinct?

posted by Nathalie Martin

Refund appreciation loans, or RALs, are among the priciest loan transactions out there.  Customers pay a fee (frequently 40% to 700% if expressed as an APR) to get their tax refund early.  The fees can be much higher.  I saw one where a consumer was owed a $4,000 tax refund, and paid $1,000 of that to a RAL provider, in order to receive the remaining $3,000 two weeks earlier than the customer otherwise would have.  In some parts of the country, for example in Indian Country, RALs seem like the only option.  This year I also saw a very well known tax preparers advertise FREE tax return preparation, only to find out they were actually providing high-fee RALs.  Not so free…..

But the RAL gravy train may be almost over.  The FDIC just ordered one of the last underwriters of the products to stop backing the controversial loans. The FDIC told Kentucky-based Republic Bank & Trust Co. that the loans are unsafe and unsound now that the IRS no longer offers banks its debt indicator, a tool loan providers used to determine whether a taxpayer had outstanding tax liabilities that could be garnished from a tax refund.

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Hot Pursuit of Customers: The Real Reason More People are Turning to Payday Loans

posted by Nathalie Martin

As one who studies the advertising and marketing plans of payday and title loan companies, I was interested in two Wall Street Journal articles published this week on the topic of payday loans, one claiming that Dodd-Frank has pushed many consumers into the hands of payday lenders, and another describing how hard payday lenders are working to steal customers from banks. Since many payday loan customers do not fully understand the terms of the loans, it isn’t that hard to steal customers from banks.  Payday loans, often at least ten times more expensive than credit cards, are easier to get. The lenders are far friendlier to customers and have more locations and business hours.  Plus, have you seen the advertising? It makes it sound easy and even fun to take out a 500% loan.  Payday loan industry experts now claim that their toughest business challenge going forward is not collecting on bad loans but finding enough new customers to keep the hundreds of thousands of stores afloat. Payday loan volume dropped $38.5 billion in 2009, or 24% since 2007, in part because of state regulation. Industry has successfully dodged regulation in some state, mostly by claiming that customers desperately need these loans for emergencies. The truth of this statement seems critical to the survival of this industry, but let’s look at the industry’s advertising and the real uses of these loans.

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Empirical Caution: A Lesson from Auto Title Loans

posted by Adam Levitin

A few weeks ago there was some nice discussion about Jim Hawkin's article on fringe banking.  Natalie questioned whether Jim's assumptions about payday lending correspond with empirical reality. Similarly, it's worth pointing out that the data Jim relies on regarding auto title lending aren't what he or even his source thought they represented.  

I make this observation not to ding Jim's paper, but to raise a really troubling problem for all academics: how to deal with data from other scholars' empirical work?  

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Fringe Lending and Consumer Welfare

posted by Alan White
Like Katie Porter, I found Professor Jim Hawkins' paper on fringe lending valuable for challenging some of the premises underlying calls for stricter regulation of fringe lending products like payday loans.  In my view, there are empirically testable criteria for regulation of fringe credit, which I hope to elaborate in a forthcoming paper.  Unfortunately, Professor Hawkins ultimately does not offer either a normative consumer welfare framework for credit regulation, or a truly empirical examination of the welfare impacts of fringe lending.  Instead, he relies on product descriptions that reflect industry marketing more than the experienced reality of working class borrowers who use them, and uses a very limited implicit definition of consumer harm to restrict the possible justifications for market intervention.

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Hawkins' Fringe Banking Premise is that Payday and Title Loans are Short-term: If Only it Were True

posted by Nathalie Martin

Paydaylendingphoto Although I disagree with the starting point of the paper Katie wrote about yesterday, Fringe Banking by Professor Jim Hawkins, and thus disagree with most of Professor Hawkins’ conclusions, I have great respect for him and am grateful that his paper is part of the national discourse on this topic. I deal with very poor people regularly and know some have no place else to go besides payday or title lenders when they need cash. Thus, I try to keep an open mind that on some level products like payday loans could serve some utility in the world, if they were truly used sparingly and for emergencies only. And if there were no rollovers and people could not use 10 or 12 of them at a time. In other words, if they worked the way Professor Hawkins says they do.

Jim’s paper gets a valuable idea out there, but the facts about how these products are really used, and how they are marketed, explain why these loan products create more problems than they solve. My own curbside data of payday use (read the long version or the short version) suggest that Professor Hawkins’ starting point, that these loans are designed to be short term and thus to keep people out of a cycle of debt, is out of synch with the reality of either borrowing habits or lender business plans. Still, his idea does start a conversation, and in this field the two sides do not talk. Period. The product designs he speaks of, if actually followed in practice, would make this type of lending much less abusive. I might even like these products.

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Fringe Banking and Financial Distress: Argument and Critique

posted by Katie Porter

Today at The Conglomerate Blog, there is an online workshop of former Credit Slips guestblogger Jim Hawkins' paper, Regulating at the Fringe: Reexamining the Relationship between Fringe Banking and Financial Distress. Jim shared some of his thoughts on what he claims is the "dubious" relationship between fringe banking and financial distress in some of his Credit Slips posts.

I found Jim's paper to be provocative and I've posted a critique of his approach at The Comglomerate as one of their invited commenters. I think Jim's definition of financial distress as too many dollars of debt is unduly narrow and that it is only by using that definition can be claim to debunk the relationship between fringe banking and financial distress--primarily by arguing that because these are small dollar loans they can't really be much of a problem. I also think Jim tends to overstate the extent to which the Bureau of Consumer Financial Protection was justified by concern about financial distress. I think its primary focus is on correcting malfunctions in markets caused by misinformation or deception. Jim himself seems open to intervention in fringe banking on that basis, as he concludes his paper by exploring rationales other than financial distress might support regulation. Check out The Conglomerate blog to join the conversation about this topic and to see the thoughts of other invited commentators: David Zaring, Larry Garvin, and Todd Zwyicki.

Local Currencies

posted by Bob Lawless

Schrute_buckOne moment that everyone seems to remember from The Office television show is the creation of Schrute Bucks, a motivational tool created by Dwight Schrute in his few moments of power as office manager. Any worker who accumulated 1,000 Schrute Bucks was entitled to five extra minutes of lunch break.

In the most recent issue of American Banker, Sara Lepro has a fascinating article on the growth of local currencies. Hardly worthless Schrute bucks, these currencies generally allow local residents to purchase them at a discount and then redeem them for full face value at local merchants. The idea is that local currencies promote local commerce, but Lepro points out their use has been growing in today's climate of mistrust against large financial institutions. The article will interest many Credit Slips visitors.

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