12 posts categorized "Usury"

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!

Does the White House Stand for Consumer Protection or for Predatory Lending?

posted by Adam Levitin

Does the Obama White House truly stand for consumer financial protection, or will it support Wall Street when it thinks no one is looking?  That's the question that the Supreme Court served up today.  The Supreme Court is considering whether to hear an appeal in a critical consumer protection case called Midland Funding v. Madden. This is one of the most important consumer financial protection case the Supreme Court has considered in years. (See here for my previous post about it.)

The Court will only take the appeal if at least four Justices are in favor of hearing it.  Today the Supreme Court requested the opinion of the Solicitor General about whether to take the case.  That's a good indication that there's currently no more than three Justices who want to hear the appeal and another one or more who are unsure (it will take five to overturn the lower court decision in the case).  If four Justices wanted to hear the case, there'd be no reason to ping the Solicitor General. 

The request for the Solicitor General to weigh in on the case puts the White House in the position of having to decide whether it wants to stand up for consumer financial protection or to fight for Wall Street.

Continue reading "Does the White House Stand for Consumer Protection or for Predatory Lending?" »

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" »

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" »

The Virtues of Price Caps

posted by Lauren Willis

In the last post I discussed the potential benefits of price caps in the small loan market, one of which was to bring the price down to what consumer price shopping would produce if it were present in that market. Now I would like to turn to the potential benefit of price caps in even the most (albeit still quite imperfectly) price-competitive credit market, the mortgage market.

While superficially appearing to be about price, the primary potential benefit of credit price regulation is that it can rein in risk. Even in the small loan market, the primary problem is not paying high, noncompetitive prices, but the risk of not being able to pay off the principal and then being trapped in debt servitude to a loan shark. This trap imposes social costs and high psychological costs on the borrower. The primary problem in the mortgage crisis has also been risk, the risk of default and foreclosure. Risk is intimately tied to price in both situations, but setting a “fair” or “efficient” price seems to me to be to be secondary. (Then again, I am culturally tone-deaf, so maybe fairness in pricing is really what has motivated usury restrictions over the centuries; some historical accounts, however, place the risk of debt servitude as the primary motivator).

Continue reading "The Virtues of Price Caps" »

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" »

Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule

posted by Adam Levitin

[Updated 1.14.13] The CFPB has come out with its long awaited qualified mortgage (QM) rulemaking under Title XIV of the Dodd-Frank Act.  The QM rulemaking is by far the most important CFPB action to date and will play a crucial role in determining the shape of the US housing finance market going forward. The QM rulemaking also represents a return in a new guise of the traditional form of consumer credit regulation—usury—and a move away from the 20th century’s very mixed experiment with disclosure.

Continue reading "Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule" »

Arbitration Unconscionability Post-Concepcion

posted by Adam Levitin

My Georgetown colleague Rebecca Tushnet has a great post about a recent Missouri Supreme Court ruling, Brewer v. Missouri Title Loans, holding that an arbitration agreement in an auto title loan was unconscionable.  The case is important because it says that post-AT&T v. Concepcion arbitration agreements are still vulnerable to attack on generally applicable contract law grounds. Perhaps contract law isn't as dead as Justice Scalia claimed in Concepcion

It's a procedural unconscionability case; the court does mentions, but does not comment on, how payments of $1000 on a $2200 loan only reduced the loan balance by 6 cents. Even Walker-Thomas Furniture would be blushing.

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Welfare Economics and Consumer Credit Paper

posted by Alan White

I have just posted a working paper on the welfare economics of microcredit and payday lending.  The paper tries to address some of the questions raised by, among others, Jim Hawkins, discussed in previous posts here and here.  Post-crisis consumer credit regulation, it seems to me, will have to proceed from norms other than revealed preferences utilitarianism.  Accepted criteria for judging the success or failure of  future regulation will be an essential first step in elaborating a fact-based regime of consumer credit rules.

Robosigning and Evidence

posted by Adam Levitin

The robosigning issue brought to mind a Talmudic evidentiary rule that declares the testimony of certain types of people inadmissible:  

These are they who are ineligible (as witnesses): a dice-player, a usurer, pigeon-flyers, traffickers in Seventh Year produce, and slaves. This is the general rule; any evidence that a woman is not eligible to bring, these are not eligible to bring.  

Mishnah Rosh ha-Shanah 1:8.  

This is hardly the Federal Rules of Evidence, but I just thought it interesting.  

The Beginning of a Return to Consumer Protection?

posted by Henry Sommer

Many years ago, in the mid 1970's, when I began my career as a legal services lawyer practicing consumer law, it seemed that we were on a roll. Congress and state legislatures were passing a bevy of laws to protect consumers (including the Bankruptcy Reform Act of 1978.)  The FTC was passing regulations and taking action against consumer scams. Innovative lawyers, often in legal services programs, were bringing class actions against a wide variety of illegal and unfair practices. These cases were received sympathetically by courts that, from a common sense perspective, could see that those practices took advantage of consumer ignorance or confusion.  Little did we know that we were at the peak of the consumer protection movement and it would be almost all downhill from there.

Continue reading " The Beginning of a Return to Consumer Protection?" »

Rigbi on Usury on Prosper

posted by Bob Lawless

When Credit Slips started, we intended to feature new scholarly papers by the bloggers and others. I am going to attempt to revive that tradition by featuring a paper by Oren Rigbi, an assistant professor in the Department of Economics at Ben-Gurion University of the Negev. Rigbi’s paper, “The Effects of Usury Laws: Evidence from the Online Loan Market,” exploits a change in the lending rules that apply to Prosper.com to examine the effects of interest rate caps. Prosper.com is an online lending web site, as Katie Porter explained just after it launched. In April 2008, a change in the way Prosper is organized meant that the interest rate cap was raised to 36% where previously some borrowers had a lower cap (depending on the state where the borrower lived). Thus, Rigbi was able to explore the effects of raising an interest rate cap on the ability to borrow, the amount borrowed, the interest rate for the loan, and repayments.

There are certainly differences across borrowers, time, and states, but Rigbi uses careful empirical analysis to control for these differences. What’s left is a measurement just of the effect of the changing in the interest rate cap. Rigbi summarizes his findings as follows: “I find that higher interest rate caps increase the probability that a loan is funded, especially if the borrower is risky and previously been just ‘outside the money.’ I do not find that borrowers change the loan amounts they request or that their probability of default rises. The interest rate paid for all loans, however, rises slightly probably because online lending is imperfectly integrated with credit markets.” Rigbi concludes his paper by saying, “The main takeaway point from this inquiry is that interest rate restrictions do not seem to deliver the outcomes for which they were intended.” My description of the methodology and findings glosses over a great deal of detail. Rigbi was kind enough to indulge me in an e-mail exchange and even kinder to allow me to reproduce it here:

Continue reading "Rigbi on Usury on Prosper" »

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