98 posts categorized "Payday & Title Lending"

More Evidence that a For-Cause Removal of CFPB Director Corday Would Be Pretextual

posted by Adam Levitin

If Trump is planning on attempting to remove CFPB Director Richard Cordray "for cause" he's hardly going about it in a smart way.  The Trump administration keeps generating more and more evidence that any for-cause removal would be purely pretextual, which strengthens Corday's hand were he to litigate the removal order (as he surely would).  

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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.

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

John Oliver and Consumer Law YouTube Videos

posted by Dalié Jiménez

I'm trying something new this year. My consumer bankruptcy policy seminar students will read many great articles by many wonderful academics on this blog, as well as others, but this year, their "reading" will also include a great deal of YouTube.

90% of the videos are John Oliver segments from his excellent show on HBO, Last Week Tonight. They cover particular "products" (student loans, credit reports, debt buying, payday loans, auto loans, retirement plans and financial advisors) and middle class issues (minimum wage, wage gap, wealth gap, paid family leave).

I thought Credit Slips readers might enjoy seeing them all in one place. Here they are in no particular order. Let me know if I've missed any!

Payday Lending Regulation: The Substitution Effect?

posted by Adam Levitin

A common argument made against regulating small dollar credit products like payday loans is that regulation does nothing to address demand for credit, so consumers will simply substitute their consumption from payday loans to other products:  overdraft, title loans, refund anticipation loans, pawn shops, etc. The substitution hypothesis is taken as a matter of faith, but there's surprisingly little evidence one way or the other about it (the Slips' own Angie Littwin has an nice contribution to the literature).  

The substitution hypothesis is prominently featured in a New York Times piece that is rather dour about the CFPB"s proposed payday rulemaking. Curiously, the article omits any mention of the evidence that the CFPB itself has adduced about the substitution hypothesis. The CFPB examined consumer behavior after banks ceased their "deposit advance programs" (basically bank payday lending) in response to regulatory guidance. There's a lot of data in the report, but the bottom line is that it finds little evidence of substitution from DAPs to overdraft, to payday, or even to bouncing checks. The one thing the CFPB data examine is substitution to pawn shop lending.  A recent paper by Neil Bhutta et al. finds evidence of substitution to pawn lending, but not to other types of lending, when payday loans are banned. I'd suggest that we're more likely to see a different substitution:  from short-term payday loans (45 days or less) to longer-term installment loans. That's not necessarily a bad thing...if the regulations are well-crafted to ensure that lenders aren't able to effectively recreate short-term payday loans through clever structuring of installment loans. For example, a lender could offer a 56-day loan with four bi-weekly installment payments, but with a "deferral fee" or "late fee" offered for deferring the first three bi-weekly payments. That's the same as four 14-day loans that rollover, and the "late fee" wouldn't be included in the APR.  That's perhaps an even better structure for payday lenders than they currently have.) The bigger point here is this:  even if we think that there will be substitution, not all substitution is the same, and to the extent that the substitution is to more consumer-friendly forms of credit, that's good.

Continue reading "Payday Lending Regulation: The Substitution Effect?" »

Payday Rulemaking: Is Too Much Competition a Bad Thing?

posted by Adam Levitin

The CFPB's proposed payday rule making is out.  There's a nice summary here.  

I'm going to reserve comment other than to note a critical implication of a rare area of agreement between the supporters and opponents of the payday rule:  it will result in a lot of payday lenders closing up shop.  That might be just what the industry needs.

Payday lending differs materially from bank lending in (among things) that there are very low barriers to entry.  Bank regulators restrict the number of bank charters in order to reduce interbank competition. (What was that about free markets, Jamie Dimon?) That mode of regulation does not exist in payday, and it results in a self-cannibalization of the industry. Most storefront lenders have very few actual customers--a few hundred per store per year. Often stores average less than one customer per day (offset only partially by the fact that these customers tend to take out multiple loans). That means that payday lenders have to amortize their fixed and semi-fixed costs over a small borrower base, which in turn results in very high priced loans even without outsized profit margins. (This also suggests that bank payday lending, like Postal payday proposals, is economically more feasible because of a broader base over which to spread fixed costs.) In other words, too much competition is actually pushing up prices.  

The situation is somewhat analogous to a population of deer (or wolves) that grows too large for the sustenance base.  The resulting overgrazing (or overpredation) can ultimately result in a catastrophic collapse.  The typical wildlife husbandry solution is to cull the herd in order to ensure that the survivors are stronger and healthier.  Regulations that have the effect of reducing the number of lenders can be thought of as functioning in a similar way. In banking, this is done through control over chartering. Insurance does this through rate regulation (preventing destructive rate races). The CFPB's rulemaking is likely to achieve something similar in payday lending. 

We've seen this happen before. In 2010 Colorado undertook a major regulation of its in-state payday industry (this after an unsuccessful round of regulation in 2007). Pew has nicely analyzed the results.  The result of the regulation was that the number of in-state payday lenders fell by half (-53%).  Demand slackened only a little (-7%; why would it disappear?), however, so the number of customers per storefront almost doubled (up 99%).  The terms borrowers received were much better under the Colorado reform, and the revenue per store increased (+26%).  

What the Colorado experience suggests is that it's possible to have both better loan terms for consumers, and a healthier payday lending industry, but only if there is a contraction in the number of lenders. Put another way, some lenders have to go out of business in order for others to do better and for consumers to get better terms. It's rather counterintuitive--normally we think of competition as an important force for consumer protection, but at a certain point, it seems, too much competition actually results in price increases.  But it goes to show that the free market may not always produce the socially efficient result. (Obviously this isn't Pareto efficient, but it could well be Kaldor-Hicks efficient.) Curious to hear thoughts. 

 

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 Financial Lives of Undocumented Immigrants

posted by Pamela Foohey

We know little about the financial lives and credit constraints of undocumented immigrants, partly because they are such a difficult to reach population. But Slips contributor Nathalie Martin gained access to this population in Albuquerque, New Mexico, interviewed 50 immigrants, and recently published a paper that provides an important glimpse into how this population handles money and finances. As the paper's title -- Giving Credit Where Credit Is Due: What We Can Learn from the Banking and Credit Habits of Undocumented Immigrants -- suggests, this population is leery of taking out credit, despite having so little income and savings that unexpected expenses quickly can become financial crises.

One of the most interesting, but expected findings is this population's extremely low level of savings. When asked if they could handle an unexpected expense of $100, three-quarters of respondents (37 of the 50) said they could not. But the majority of interviewees also expressed serious concerns with taking out credit, including via credit cards and the almost inevitable title loans (and payday loans, but most payday loans require a bank account, which a majority of respondents did not have). Indeed, they stated that they would rather ask family and friends for help, including help in trying to find work, which adds nuance to what we know about low-income individuals' feelings about relying on family and friends to deal with unexpected expenses (for instance, see Laura Tach and Sara Greene, Robbing Peter to Pay Paul). Martin's paper also contains data about how undocumented immigrants think about what ultimately often are legal problems and using (or not using) the legal system. Taken together, the paper provides a needed first glimpse into the financial lives of a subset of people who are in the country.

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.

Continue reading "It Is Very Expensive To Be Poor" »

Advertising and Payday and Title Lending: How Do Lenders Target Borrowers?

posted by Pamela Foohey

Are bigger payday and title lending companies better for low-income borrowers than smaller companies? Jim Hawkins (Houston Law Center) takes up that question in a new article which reports the results of his study of the advertisements of payday and title loan companies with storefronts in Houston, Texas. The results are quite timely given that the Consumer Financial Protection Bureau is poised to release regulations for payday lenders. Based on Colorado's experience with payday lending reform, these regulations have the potential to increase large lenders' market share. What might be the consequences of consolidation?

Hawkins begins to answer that question by comparing big and small lenders located in Houston based on their compliance with Texas regulations, prices, use of "teaser rates," and attempts to target minorities and women through storefront and online advertising -- all of which are practices that critics of payday and title lending have identified as particularly problematic or exploitative. His results overall are mixed. For instance, larger companies in Houston are more likely to feature minorities in advertisements, and smaller companies are more likely to feature women. Perhaps the most interesting finding is that there is price competition among these companies in Houston: larger companies tend to charge higher APRs than smaller companies. Given that the CFPB regulations will not cap interest rates, might there be unintended consequences of regulations that may bolster large lenders?

Searching CFPB Consumer Narratives

posted by Pamela Foohey

Yesterday the Consumer Financial Protection Bureau (CFPB) went live with its consumer complaint database, publishing over 7,700 consumer narratives detailing problems they have faced with banks, debt collectors, and other creditors. The CFPB also issued a request for information seeking public input on how it can make the data more useful to the public, including how to normalize the narratives to make them more comparable. Which prompted me to search through some of the narratives.

The website allows for viewing of the narratives online by products and services, as well as downloading of data. Some of the products are broken down by sub-product--such as medical specific debt collection and payday loan specific debt collection. The narratives in each product category seem to be searchable by words and phrases. For instance, I searched the payday loan product category by the name of a notorious lender.

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Lessons For Consumer Protection From The World Of Inclusive Capitalism

posted by David Lander

Lately I have been teaching courses with names such as "Global and Economic Justice" and "History, Impacts and Regulation of Consumer Credit" instead of "Bankruptcy," "Secured Transactions" and "Chapter 11 Reorganizations." So I have been reading different books and listening to different speakers. A lecture I attended recently by Xav Briggs  here brought to my mind a couple of books that I use in one of my courses, “Borrow” and “Debtor Nation” both written by Louis Hyman. In many ways Hyman's books remind me of "Credit Card Nation" the outstanding and "ahead of its time" book by Robert Manning which I used extensively when I created my consumer credit course in 2002. 

Part of the wisdom I find in each of these books is the caveat that you cannot understand consumer protection without understanding the nature of American capitalism or the drive for an above-market return. This was never clearer or more of a "blow to the side of the head" than during the frenzy in the early 2000's, and perhaps nothing demonstrates it more crassly than the rating agencies covering their eyes as they rated subprime securitizations allegedly in order to "keep the business." 

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Auto Title Loans: Like Payday Loans, But Larger and Riskier

posted by Pamela Foohey

The Pew Charitable Trusts today released a report focusing on the market for auto title loans. The report brings together data from a wide variety of sources (including Slips contributor Nathalie Martin's work) to provide a clear, succinct, and thorough overview of the mechanics of this under-studied industry. It also, and most interestingly, includes the results of Pew's nationwide survey of borrowers and discussions with focus groups.

The empirical data underscore how similar auto title loans are to payday loans, and how regulation of this part of the alternative finance industry also is greatly needed. The report is particularly timely in light of the Consumer Financial Protection Bureau's anticipated upcoming release of payday loan rules, and its field hearing tomorrow in Richmond on payday lending.  

People reported taking out auto title loans for similar reasons as to why they take out payday loans: they make less than $30,000 a year and primarily need money to meet everyday expenses, though some use the money to pay unexpected expenses. People also reported having other options to borrow money or cut expenses. Even so, they focused on the ease of getting money, relying on lender location and advertisements, and word of mouth, rather than comparison shopping or considering other ultimately less expensive ways to obtain credit. What is perhaps most disturbing is that a sizable portion of people reported paying back these loans via the exact means that they rejected when taking out the loans: borrowing from friends and family, going to banks or credit unions, and using credit cards.

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Hacking and Systemic Financial Risk (Encore)

posted by Adam Levitin

The data breach stories just don't seem to stop. (And why would they?). The latest (I think) is about a massive and sophisticated multi-million dollar hacking of several banks.  If you read down through the story, one of the things the hackers did was manipulate the balances of real accounts.  They'd change a real $1,000 balance to $10,000 and then have $9,000 wired to an account at another institution.  

But why take out only $9,000?  The hackers were being nice, I suppose, in that they didn't steal any actual depositor's funds (as far as we know). And that was also probably smart, because if they zeroed out an account, there might be a bounced transaction that would alert the consumer and then the bank to the theft.  But I don't know that we can count on future hackers being so polite, considerate, or careful. Indeed, they might actually want to create havoc by messing with account balances.  

I raised this scenario several months ago, and before that a couple of years ago. I think today's news confirms that the financial Armageddon via hacking scenarios I have nightmares about aren't totally farfetched. Between state-sponsored hacking (I'm looking at you DPRK), terrorist hacking (ISIS and Newsweek), and rogue individuals, I think we're looking at a matter of when, not if, we see consequences from financial hacking that go beyond a few hundred million in losses and result instead in institutions failing. 

How the Disappearance of Locally-Owned Banks Hurts Rural Economic Development

posted by Nathalie Martin

In preparation for some upcoming projects with sociologists, including my new collaborator Rob Mayer (Utah) and on another project, Alan Burton (UNM Sociology professors and UNM law student), I am beefing up on my sociology research. Alan directed me to a recent article, Restructuring the Financial Industry: The Disappearance of Locally-Owned Traditional Financial Services in Rural America. This article explains how the loss of small banks in rural America has negatively affected economic development, which has in turn reduced opportunities for rural communities to increase income, reduce poverty, decrease out-immigration, and reduce crime rates.

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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.

Nostradamus-Style Predictions for Consumers in 2015

posted by Nathalie Martin

First some easy ones you all know:

1. The stock market will drop, perhaps precipitously, making now great time to rebalance retirement portfolios.

2. The price of gas will inch up and in the meantime, more states will add a little gas tax here and there to quietly fill empty coffers.

On Mortgage Lending:

3. There will be more low rate, “no closing costs” home refinancings available to good credit risks, as lenders try to figure out what to do with themselves. Not much of a spoiler here, since this is already happening.

4. More lenders will be answering the phones when borrowers want to settle up their mortgages. Lenders will be cutting the red tape that is costing them a fortune. Also, more lenders will be settling pending home foreclosure litigation. Something is better than nothing, some might be thinking. 

5. Cases that don’t settle will result in more large judgments against lenders, in part because lenders did not do some of the things mentioned above all along.

On High -Cost Lending:

6. The CFPB will announce its long-awaited payday lending rules, which will apply to all high-cost loans, including payday loans, title loans, and high-cost installment loans.  These new rules will go a long way (though perhaps not all the way) to curbing high-cost lending abuses and protecting consumers from the debt trap. After all, the bureau is called the Consumer Financial Protection Bureau. Lenders will not like the rules much and may even sue over them but they won’t have a high-cost leg to stand on.

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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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Goodbye to Military Lending Act Loopholes

posted by Nathalie Martin

How long will we be seeing signs like this in our communities?  Cash store smallerI refer specifically to the little sign in the store “Military Welcome,” which arises from sneaky loopholes that have been used for years to get around Military Lending Act (the “Act” or the MLA”), a bipartisan law passed by the House and Senate and signed into law by President George W. Bush as a part of the 2007 National Defense Authorization Act.  The law recognized that payday and other high cost loans interfere with military readiness and as a result, passed a rather uncontroversial 36 percent military APR, including all costs and fees. 36% period. End of story.

But we know it wasn’t true and as always they found their way around it, circumventing the definitions, increasing the terms, so on and so on. Last week, the Department of Defense released proposed rules to close the loopholes, thank goodness, given that no one opposed the MLA. The spruced up law still does not cover any transaction that is not covered by the Truth in Lending Act, meaning that big overdraft fees and rent-to own are still problems for Military personnel.  Also, the scope of the Act is still limited, so the Act still does not cover expensive auto purchase loans, mortgages, or purchase money goods, which can still cause hardship for Military families. Still, this is a big improvement in a situation that has circumvented the full supported MLA for a very long time. This DOD press release contains most of the details. Very nice.


Feeling Vindicated

posted by Adam Levitin

My Consumer Finance students used to think I was wasting their time by spending a whole class session on usury laws and taking them into the nitty-gritty of their application (or non-application). I think usury is important conceptually (but for the Marquette decision and its fallout, our regulation of consumer credit would likely be very different), has a lot of neat statutory reading twists and turns, and it actually can matter for non-bank lenders.  Among other things I cover is the NY state usury statute, including its criminal provisions. Cyrus Vance's prosecution of payday lenders under the usury statute would seem to vindicate my choice of class materials. 

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.

Not all Native Americans are Doing, Let Alone Getting Rich Off, Payday Loans

posted by Nathalie Martin

 The Wall Street Journal has run several stories over the past few years about how Indian Tribes are getting rich off payday lending. These stories always tell a fraction of this story, leaving readers with the misperception that all tribes do this lending and that those who do, get rich. The reality is that only a small percentage of Native people do payday lending, and the only people getting rich off these operations are non-tribal lenders that use tribes to get around state laws. A week or two ago, it happened again. The Wall Street Journal published Payday Loans Have Brought Jobs and Revenue, but Tribal Leaders Say Government Crackdown Jeopardizes Business, once again claiming that tribes are getting rich off this business.

The article, also about operation choke point, claims that payday loan revenues make up one-fifth of the revenue on some tribal lands, but give no details on the dollars made. The story quotes one tribal member making $10 an hour, as well as the head of the Native American Financial Services Association, which represents just 19 of the 566 federal registered Indian Tribes. These people like tribal payday lending. But they are but one tiny voice in the debate as most tribes neither engage in nor condone this business. A July 17, 2014, an Al Jazeera story also covered operation choke point but told a very different story. This article entitled When tribes Team Up With Payday Lenders, Who Profitsdescribes exactly how tribal payday lending (part of the four billion dollar online payday loans industry) works. Little of the revenue flows to the tribe, sometimes 1% of the loan, or even just a finder’s fee of $2.50 to $5.00 per loan.

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Small-Dollar Loans to Servicemembers, the Electronics Version (or an Easy Way to Get Around the Military Lending Act)

posted by Pamela Foohey

Yesterday the Consumer Financial Protection Bureau, along with 13 state attorneys general (including from my new home state of Indiana), announced a $92 million settlement and issued an enforcement action against Colfax Capital Corporation and Culver Capital, LLC, known as Rome Finance, for targeting military families (and other consumers) with predatory loans to buy electronics, such as computers and televisions.

Rome Finance would offer credit to consumers for the purchase of such electronics primarily at mall kiosks near military bases, promising instant financing and no money down. Rome Finance then jacked up the price of the electronics, thereby masking true finance charges and APRs, withheld information on bills about balances and payments, and violated various states' laws in collecting the debts. In some instances, service members would receive statements indicating that the APR on their loan was 16% when the APR really was over 100%. The scheme is a reminder of the endless variations that companies peddling alternative financing / high-cost credit may use, and how broad laws against predatory lending need to be in order to be effective.

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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.  

Operation Choke Point: Payday Lending, Porn Stars, and the ACH System

posted by Adam Levitin

Pop quiz:  what do payday lenders have in common with on-line gun shops, escort services, pornography websites, on-line gambling and the purveyors of drug paraphrenalia or racist materials?  

You can read my testimony for this Thursday's House Judiciary Committee, Subcommittee on Regulatory Reform, Commercial, and Antitrust Law's hearing on Operation Choke Pointo find out. Or you can just keep reading here.  

Continue reading "Operation Choke Point: Payday Lending, Porn Stars, and the ACH System" »

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.

Continue reading "I am Approved for a Payday Loan" »

Payday Lending and the FTC Credit Practices Rule

posted by Adam Levitin

Why doesn’t payday lending violate the FTC’s Credit Practices Rule (16 C.F.R. 444.2)?  That’s what I’m trying to figure out.  

The Credit Practices Rule prohibits taking or receiving directly or indirectly an assignment of wages in most circumstances.  (None of the exceptions appear applicable to the payday lending context.) The FTC has gone after some payday lenders for taking a formal direct assignment of wages, but that's an usual term for payday loans. Rather, I'm more interested in the question of an indirect wage assignment. I think there's a pretty good case that a payday loan is an indirect assignment of wages:

  • A payday loan is called a “payday loan”—it’s designed to ensure repayment from the borrower’s wages;
  • the loan’s maturity is usually designed to match with pay periods;
  • usually the only “underwriting” is verification of the borrower’s employment;
  • the loan is “secured’ with either a post-dated check or authorization for an ACH debit with the date set for…payday.  

That sure looks to me like an indirect assignment of wages—the loan is designed to enable the lender to be repaid from the borrower’s wages without having to go to court and get a judgment and a garnishment order (i.e., a judicial wage assignment).  

I’m curious to hear readers thoughts on whether this sounds right or whether I’m missing something.  Please limit comments to the legal interpretation issue—I’m not looking to open a discussion on the merits of payday lending, just to understand if it violates the FTC Credit Practices Rule or if not, why not.  

New Data and Thoughts on Payday and Other Alternative Lending

posted by Pamela Foohey

The Consumer Financial Protection Bureau's new study (published 3/25/14) regarding payday loans has received substantial press coverage over the past couple days. The study focuses on repeat customers and finds that 80% of payday loans effectively are rolled over--that is, another loan is taken out within 14 days of repayment of the prior loan. (Some states have legislated cooling-off periods for payday loans; in those states, loans cannot be rolled over, but customers are free to come back a few days later.) The study further finds that the loaned amount goes up as loans are rolled over and that nearly 50% of all loans are in a sequence at least 10 loans long. This means that payday loans generally are not used by customers as short-term "stopgap" loans to keep them out of a cycle of debt. Rather, customers are in debt effectively for months, as Credit Slips contributor Nathalie Martin's research previously has suggested.

The study's release coincided with yesterday's Senate Committee on Banking, Housing and Urban Affairs, Subcommittee on Financial Institutions and Consumer Protection's hearing titled, "Are Alternative Financial Products Serving Consumers?" -- at which Nathalie testified. The hearing raises larger questions about the federal government's role in regulating the landscape of alternative lending. This includes payday loans and, as Nathalie noted in her testimony, similar short-term loans that are designed in part to bypass state laws regulating "traditional" payday loans.

Continue reading "New Data and Thoughts on Payday and Other Alternative Lending" »

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. 

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

Payday Regulation and Financial Security

posted by Adam Levitin

The payday loan industry is running scared these days; the industry definitely feels that it is in the CFPB's cross-hairs. Accordingly, it is not surprising to see the industry trumpeting a new poll of payday borrowers' attitudes about the payday experience. 

Three thoughts about this poll.  First, the value of the information it contains often seems quite limited by the nature of the questions and the respondents.  

Second, even if the poll really supports the interpretation put forth by the payday industry--that most payday consumers like the product--it hardly addresses whether payday loans should be regulated. At best, the poll suggests that banning payday products outright without reasonable short-term small-dollar (STSD) credit alternatives would leave some unmet consumer demand. The regulatory issue with payday loans is not just a binary regulate or not question. Instead, there are a number of regulatory options that would limit the features of payday loans that are particularly problematic, namely rollovers and refinancings that turn payday loans from being short-term to longer-term.

Third, the whole debate about STSD credit regulation kind of misses the point, however, which is why so many consumers are likely to turn to relatively expensive forms of STSD credit. The demand for STSD credit appears to be largely a function of middle and working class financial insecurity. That's the real issue that needs to be addressed.  I flesh these points out in more detail below.

Continue reading "Payday Regulation and Financial Security" »

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

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

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.

Continue reading "Military Lending Act Has Loopholes Says NY Times Dealbook" »

Follow the Money: Payday Laundry Edition

posted by Adam Levitin

Gretchen Morgenson is asking some interesting questions about where the money comes to fund predatory loans. The issue boils down to this:  the most questionable consumer is not done by depositories.  It's done by finance companies or (prior to 2008) by mortgage banks.  That means that these lenders need another source of funding for their loans. That could be their investors' equity, but more typically it is via lines of credit from other financial institutions. Absent lines of credit from large financial institutions, the amount of high-risk lending done in the US would likely be substantially less.

I hope that bank regulators (and Congress) start asking why banks are willing to fund loans that they aren't willing to make directly themselves because of reputational concerns. The current situation looks a lot like a rent-a-BIN variation:  instead of the bank providing the front to avoid usury laws or to enable MC/Visa card issuance, here we have the rent-a-finance-company situation, with the banks basically undertaking predatory lending behind the mask of the finance companies. Specifically, it sure looks as if NY banks were financing on-line payday lenders that made loans to NY residents at rates that violated the NY usury laws. (Let me emphasize that the issue here is not whether payday loans are good or bad--that's a separate discussion--but simply whether the NY usury laws were violated.)

It's hard to believe that the banks didn't know that the on-line loans were being made into NY. While there is a legal question about whether the on-line lenders are subject to the NY usury law, this was a risk the banks seem to have been willing to accept.  I don't know if that's enough to rise to the level to justify charges like aiding-and-abetting or conspiracy or the like (does Destro bear guilt for COBRA's actions?), but it's hard to call it anything other than payday loan laundering. 

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. 

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

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:

Continue reading "Interesting Automatic Stay Decision in FastBucks Chapter 11 Case" »

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.

Continue reading "Usury and the Loan Shark Myth" »

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.

Continue reading "The Behavioral Economics of Title Lending" »

Banks Processing Internet Payday Payments through Bank Accounts that Customers Asked be Closed

posted by Nathalie Martin
Banks and payday lenders have be close pals for a while now. First, we learned that banks were funding payday loans by lending to the lenders, then we learned that banks were doing their own payday loans or “Direct Deposit Advances” as some prefer to call them, and now, thanks to NYT writer Jessica Silver-Greenberg , we learn that some banks are helping payday lenders in a different way, by processing internet payday advances through bank accounts, even after being asked by customers to close the accounts, and even when the only money in the accounts is child support. The story claims that these lenders allow the auto withdrawals to go through even in states where payday loans are banned by law. The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from their accounts, but the FDIC and the CFPB are taking a close look, by examining banks’ roles in the online loans. No doubt these loans have caused many to overdraw their accounts, which will be the subject of my next blog on ChexSystems. Stay tuned

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?

Continue reading " Title Lending’s Big Question: Dude, Where's My Car?" »

Disclosure 2.5: Moving from the Lab to the Field

posted by Lauren Willis

If financial education classes and lab-tested disclosures are unlikely to help consumers in their real-world financial decisions, what about field-tested targeted education/disclosure? Exciting work by Marianne Bertrand and Adair Morse shows that information given to payday borrowers can reduce their future borrowing, holding payday lender behavior static. Although this last caveat seriously limits the external validity of their results, the potential implications of their work are wonderful enough to be deserving of a full description here.

Continue reading "Disclosure 2.5: Moving from the Lab to the Field" »

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.

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

Big Banks Offer Payday Loans

posted by Nathalie Martin

Yes, we know they do, but a Bloomberg story this morning caught my eye. I’ve known for quite a while that Wells Fargo and First Third Bank offered these payday-style loans, called direct deposit advances or ready advances, and also that certain bank customers get these prompts for this “service” EVERY time they go to an ATM. In fact, I know a woman who has one of these loans out from Wells Fargo pretty much at all times, except when once a year they ask her to clear it, at which point she goes to another payday lender to pay it off.

Still, Carter Dougherty’s story today added something I didn’t know, namely that so many people are finally interested in this.  The attorney general of North Carolina has asked the lenders to explain why the loans do not violate North Carolina’s famously successful state interest rate cap. A private lawsuit filed in U.S. District Court in Ohio claims that Fifth Third Bank deceived customers about the true costs of the loans.  Both the FDIC and the CFPB have taken notice of the loans and are investigating the practices. Enjoy the full story here.

MyConsumerTips.info

posted by Amy Schmitz
I have been working for a few years in developing and creating a consumer outreach website at MyConsumerTips.info.  The site is purely non-profit and has no sponsors or advertisers. It aims to simply provide consumers with “consumer tips” that change each day, independent summaries regarding debt-related and other consumer rights, quizzes and polls regarding such issues, and other consumer protection resources. It is user-friendly and interactive. This is part of my larger “Consumer Empowerment”service and experiential learning projects, and outreach endeavors.

Unfortunately, it is tough to gain traction for such non-profit sites without paying for promotions through Google or others. Also, there so many sites that purport to provide consumer resources that individuals suffer information overload and are not sure what to trust.

Hopefully, MyConsumerTips.info will deservedly gain trust, do some good and expand in ways that benefit consumers!  Check it out.

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!

Continue reading "The Gender Divide in Payday Lending " »

Payday and Title Loan News Today

posted by Nathalie Martin

If you are interested in two fascinating stories on payday and title lending, check out these two links. The payday article is entitled Payday Lenders Using Courts to Create Modern-Day Debtors’ Prisons in Missouri, and the title loan one is called Virginia becomes hub for risky car loans.

 

Online Payday Lenders Seek More Respect and Less Oversight: Call Them What You Like, They are Still 1,000% Long-term Loans

posted by Nathalie Martin

On-line lenders who are not tribal or offshore claim that they need the same lack of oversight that the tribal and onshore on-line lenders are getting. Otherwise, it isn’t fair to them.  Hmmm….. Fairness is as fairness does. Keep in mind that these on- line loans:

- accrue interest at twice the rate of storefront payday  loans or about 800-1,000% per annum, and 

-are designed so the fee is paid automatically out of the customer’s bank account, …over and over again, but the loan principal is never repaid. 

Lenders now request that we stop hurling derogatory epithets at them, such as er, “payday loan.”  They provide no explanation of why these loans are not payday loans but ask that we now call them “short-term, small dollar loans. Why we would call a loan like this (that is frequently kept out for months if not years) a short-term loan is beyond me.

Lenders are spending millions to lobby Congress to exclude these loans from state payday loan legislation and transfer all oversight of on-loan payday lenders from states to the Office of the Comptroller of Currency. Hello preemption! The prosed bill would also “loosen the rules for how short-term lenders disclose the total costs of the loans to consumers,” according to a Bloomberg story, by excluding any loan with an initial term of less than a year from the Truth in Lending Act. That way, I guess, customers would not know the loans carried interest rates of 800-1,000% and this would be further “fair” to these lenders.

With 35% of the payday loan market now in on-line loans, this is an incredibly important bill…to defeat. Let’s hope for a race to the top, not the bottom.

 

 

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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