108 posts categorized "Payday & 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?

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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.

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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.

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!

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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.

 

 

Payday Loans and the Tribal Sovereignty Model

posted by Nathalie Martin

Think about what happens when you pit tribal sovereign immunity against effective consumer protection laws. In my view, no one wins. Yet payday lenders are now very actively seeking tribes with whom to partner, in order to get the benefits of tribal sovereign immunity.  As one might expect, the payday lenders make out big and in most cases, the tribes get very little, at least so far.

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Is it Literally Impossible to Pay Off a Title Loan?

posted by Nathalie Martin

I recently published a law review article entitled Grand Theft Auto Loans with Ozy Adams.  It discusses title lending based upon data collected by the State of New Mexico.  This article cover a tremendous amount of ground, but as these things tend to go, I have now heard of two critical topics we should ahve discussed but didn't. 

We do discuss how the loans are almost always interest-only and can only be paid off all at once, not in installments.  We also talka bout how these loans are also typically entirely asset-based, meaning that if a customer has no income at all, she can still take out a large title loan. We also discuss repo rates per loan (between 5% and 22%),  repo rates per customer (between 20 and 70%), total vehicles lost once reclamation is taken into account per customer (between 13% and 60%), interest rates for title loans (most commonly 300% per annum or 25% per month), percentage of auto value lenders will lend on (25-40%), and amount returned to customer from sale proceeds after repossession and sale (next to nothing once the fees are racked up). 

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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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Payday Loans are First Target of New Consumer Protection Chief

posted by Nathalie Martin

Richard Cordray’s first CFPB hearing will be held today and will focus on the practices of payday lenders. Seventeen states and the District of Columbia already outlaw payday loans, but in all of the others, lenders can and do charge 400% interest or more, on loans against consumers' next paycheck. Under terms of the 2010 Dodd-Frank Act, the CFPB could not regulate payday lenders or other nonbank entities that provide financial products until its director was in place. As Republican senators were blocking Cordray's confirmation, President Barack Obama used a recess appointment to install him last month. Cordray's first order of business was to launch the bureau's nonbank supervision program, from which today's hearing springs. Consumer advocates are very hopeful that the CFPB will use its authority to scrutinize industry loan records and marketing materials and gauge their compliance with federal laws. According to Jean Ann Fox of the Consumer Federation of America, consumer groups also hope that the CFPB will develop new rules regarding industry practices deemed unfair, deceptive and abusive.

Carter Doughtery of Bloomberg News just posted a more detailed description of the CFPB's current inquiry into payday lending.

Big Banks Finance Payday Lenders: You Knew that but did you Know some also Make payday loans?

posted by Nathalie Martin

This video is totally worth you 2 minutes. It describes big banks in rather unflattering terms (as parasites, for example) but the main thing I got out of it is that big banks finance payday lenders. Yes, it is true that the same banks that received TARP bailout money are funding payday lenders.  The payday lenders include Advance America, Cash America and ACE Cash Express, which allow customers to borrow against future paychecks, and which charge an average interest rate of 455 percent on top of fees of $15-18 per $100 loaned. These lenders depend on the big banks' financing for their business.  Moreover, Wells Fargo, Fifth Third Bank, and U.S. Bank, all make their own payday loans too.Talk about double dipping!

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The FTC File Suit To Crack Down on Abuses by Internet Payday Lenders

posted by Nathalie Martin

I recently presented a paper at the University of San Francisco School of Law, after which Professor Jesse Markham sent me a link about the FTC’s power to regulate payday loans.  I have been a bit fixated on what the CFPB what might be able to do to regulate these products, particularly the entirely unregulated wolrd of internet payday loans (see my brief musings on that topic in the Harvard Business Law Journal), but I had no idea this had also caught the attention of the FTC.

A recent post on the FTC’s web page describes a District Court case brought by the FTC against Payday Financial, LLC, doing business as Lakota Cash and Big Sky Cash, who allegedly send documents to their borrowers’ employers that mimic a garnishment by the Federal government,

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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.

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

What Can The CFPB Do To Regulate Payday Lenders?

posted by Nathalie Martin

Even though the CFPB cannot cap interest rates on payday loans, there is still plenty that the CFPB can do to regulate these lenders. But what should the Bureau do? Some of the trickiest aspects of the payday lending issue have nothing to do with interest rates, and everything to do with how the loans are marketed and used.

Even the staunchest consumer advocate would likely look favorably upon a loan product that allowed people who could not otherwise get credit to borrow money for occasional, unexpected, emergency expenses. I suspect that most would agree that this would be a good and useful loan product even if it cost $15 or $20 for every $100 borrowed, as long as the product were used only occasionally to smooth consumption. This would be true even if the annual interest rate was over 500%. In a way, the annual percentage rate interest would not matter much because the loans would be truly short term, both in design and marketing, as well as actual use. 

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The Truth About Title Loans and Repossession

posted by Nathalie Martin

Susan Price filed for bankruptcy in 2005, when she became disabled. She now receives $980 a month in disability payments and her rent is $550. Not so bad unless you consider her last move to make ends meet. She borrowed $4,000 to make it through the holidays and pay off some bills, using her $10,000 Jeep as collateral. The jeep was the last vestige of her formerly middle class life. Under her eighteen-month loan, she pays $581.47 a month, and will pay over $10,466.46 to pay off the $4,000 loan.  At least Susan’s loan includes some principal. Another client, Sean, paid $11,516 total, on a $1,500 interest-only title loan. He paid over $10,000 in interest on the loan, which was renewed forty times before the borrower buried his pride and asked his parents to pay off the $1,500 in principal.

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The "Bachelor Party Payday Loan Ad" Makes the NYT

posted by Bob Lawless

Andrew Martin over at Bucks blog at the New York Times also found and commented on the payday loan company trolling for customers who wanted to finance their bachelor party at a 300% APR. As our own Nathalie Martin commented a couple of weeks ago when noticed the same ad: this takes the cake. (BTW, that web page will try to stop you from hitting the "back" button on your browser to get back to this page -- another business practice only employed by the "finest" companies.)

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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Auto Title Lending Data

posted by Adam Levitin

Todd Zywicki has written several articles (here and  in a fuller version here) on auto title pledge lending that cite default rates on auto title loans are 14-17%, while repossessions occur only in 4%-8% of cases and in 20% of those cases the borrower redeems the car. These numbers are cobbled together from several disparate sources, so they might not all fit together, but from this (and borrower characteristics) Todd concludes there's no basis to claims that auto title lending is predatory.

These numbers long seemed too good to be true to me—they would imply either huge profit margins (which Todd disputes) or huge overhead costs (Todd's explanation). They also seemed highly skewed by the fact they were counting loans rather than borrowers. Title loans are 30-day loans that can be rolled over, but a roll-over counts as a new roll, which effectively inflates the denominator for default rates. 

I came across a rather obscure Tennessee Department of Financial Institutions study (actually cited by Todd) that has some numbers from examinations of title lenders, and it seems to tell a somewhat less rosy story about title lending.

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Credit Cards to Payday Substitution?

posted by Adam Levitin

Over at Volokh Conspiracy, Todd Zywicki spent Christmas Eve crowing about a Wall Street Journal article about the boom in payday lending. Todd sees the article as vindication for his insistence that regulation of consumer credit will inevitably result in a substitution of another type of credit. For Todd, the substitution hypothesis makes regulation not just pointless, but actually harmful because it will eventually push consumers into the arms of loan sharks.  

There are a whole bunch of problems with the substitution hypothesis, as well as for Todd's interpretation of the WSJ article. Todd writes that: 

Maybe instead we ought to acknowledge that there will be unintended consequences, such as by making credit cards less available regulation will drive many consumers to substitute to more expensive types of credit, such as payday loans? And just wait until the well-intentioned bureaucrats at the CFPB really start protecting those poor folks, then they are really going to get it.

For starters, Todd doesn't accurately summarize the WSJ article. He implies that it was referring to credit cards in general. It wasn't.  It was referring to subprime credit cards. The WSJ article quotes a payday lender as stating, "We believe that we're starting to see a benefit of a general reduction in consumer credit, particularly ... subprime credit cards."  

It turns out that subprime credit cards are often as or more expensive than payday loans. The Credit CARD Act severely curtailed a type of subprime card called "fee harvester" cards. A 2007 NCLC study shows that the costs of fee harvester cards rival or exceed payday loans. So if there's substitution here, it might actually be a good thing. The article is certainly not evidence for middle class consumers getting driven into the arms of payday lenders. Instead, at best, it shows some substitution of fringe financial products and it isn't clear that it is harmful substitution. 

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A New Title Loan Philanthropic Organization?

posted by Nathalie Martin

I have been studying payday and title loans advertizing.  A student told me about this web site .  He heard an ad for it on the radio.  The Title Loan Advocates claim to be a “foundation” created to educate the public about the title loan industry.  Their top goal is to help people understand how title loans work.  Their second goal is to help consumers get their interest rate and payments lowered so they can eventually get out from under their “never ending title loans.”  The foundation claims to have saved clients an average of   $2,000-$4,000 over the life of their loans, and tons of customers are quoted on the page as loving this “service.”

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The KFC of Payday Loans

posted by Bob Lawless

If Kentucky Fried Chicken can become KFC to disguise the fact it is serving deep-fried food, why can't the same idea work for payday lenders? The Payday Loan Store is now just PLS. Although I hate to give them any more publicity, check out their ad where a short-term, high-interest loan is euphemistically called a "PLS Smart Loan." The expensive debt trap of payday lending has apparently acquired a negative connotation. Who would have thought? Just like KFC, however, a name change should not disguise the fact the product remains just as bad for you.

Hat tip to Frank Venis for drawing this to my attention. And, before anyone e-mails me or posts a comment that Snopes says I have the KFC story wrong, please read this.

What's Eating Todd Zywicki?

posted by Adam Levitin

It's no secret that there's no love lost between Todd Zywicki and Elizabeth Warren.   But Todd's latest salvo in this feud is simply filled with inaccuracies.

Todd goes after Elizabeth for (1) her medical bankruptcy research, (2) the Two-Income Trap, and (3) the treatment of strategic defaults in Congressional Oversight Panel reports.  Todd's charges in (1) and (2) are just rewarmings of his past critiques of Elizabeth's work and of Meghan McArdle's botched hatchet job of Elizabeth in the Atlantic for which she was taken to the woodshed by numerous observers (see also here and here, for example).

But what about the Congressional Oversight Panel's treatment of strategic defaults? Here, Todd's claim is demonstrably false.

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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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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.

Broke USA Tells Payday Loan Stories from the Ground Up

posted by Nathalie Martin

Those interested in the dark crevices of consumer lending might want to go to the library or book store and pick up Gary Rivlin’s new book Broke, USA, or at least read this article about it. I just had a spirited discussion with some lenders’ attorneys about payday lending and they insisted that I not worry so much about 500% APRs but instead focus on the high cost of making these loans. In other words, as the argument goes, profits are not that high so the rates are necessary.

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Auto Title Loans, Not So Bad After All--Who Knew?

posted by Nathalie Martin

In a recent article, Money to Go:  Auto Title Lending has an Important Role in the Financial Services Marketplace, Professor Todd Zywicki concludes that outlawing title loans would be bad for consumers, and that title loans are cheaper and better for consumers than their likely alternatives.

Many statements in the article seem questionable, including that:

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Fringe Banking, Financial Distress, and the Consumer Financial Protection Agency

posted by Jim Hawkins

I'd like to say thanks again for the chance to share some thoughts at Credit Slips.  I've really enjoyed the comments.  I wanted to end with a post about a current issue before Congress. 

One reason it is important to know what financial distress means and to understand the relationship between fringe banking and financial distress is that policy makers consistently use financial distress to justify intervention into fringe markets.  Because financial distress creates externalities, it is a powerful tool to justify regulation.

A speech President Obama made late last year arguing for the Consumer Financial Protection Agency (still working its way through Congress) is a good example of how this works.  To make the case for the CFPA regulating payday lending, the President gave the example of a women who'd taken out a payday loan.  He linked the product to wide-spread financial distress: "Abuses like these don't just jeopardize the financial well-being of individual Americans—they can threaten the stability of the entire economy."  As I have argued, I think this claim is really hard to make out.  Financial distress might justify the CFPA regulating credit cards or mortgages, but I don't think it justifies regulating on the fringe.

Relying on a link between fringe banking and financial distress distracts from the other persuasive arguments for creating the CFPA.  And, in other contexts, it leads to regulation aimed at solving the wrong problems.  People using fringe banking need protection, but we need to rethink regulation aimed at preventing financial distress because it solves a problem that I don't think exists. 


 

Credit Reporting in Fringe Credit Markets

posted by Jim Hawkins

Credit histories are an important part of what separates mainstream credit from fringe credit.  One reason I believe that fringe banking is unlikely to cause financial distress is that fringe credit firms do not use credit histories to evaluate the likelihood a borrower will repay a loan.  Instead, they assume the risk of nonpayment is high, so they structure the transactions to guarantee repayment through other means like collateral.  Or, they limit the likelihood of default by only loaning small amounts.  Credit cards, on the other hand, rely on credit histories and offer high credit limits without any collateral--the recipe for a product causing distress.  Ironically, the better credit you have, the higher likelihood you will take on a credit product that could cause financial distress.

Richard Brooks has argued that people using fringe banking do not get "credit" for positive histories with fringe lenders because fringe lenders do not report this activity to credit bureaus.   

But, maybe both these observations are about to change.

Continue reading "Credit Reporting in Fringe Credit Markets" »

Fringe Banking and Financial Distress

posted by Jim Hawkins

The answers to the question about the definition of financial distress track with my thinking too.  On the one hand, we could define financial distress loosely and almost everything counts (like forgetting your wallet and needing to pay for parking).  Stephen Ware once wrote that financial distress could mean having wants that exceed your ability to pay.  For me, such a loose conception of the term causes it to lose any meaning.  Wants exceeding needs could be the owner of the Yankees wanting to own a NBA team but not having enough money.  This expansive of a definition misses the heart of distress which seems to relate to not meeting basic needs or getting collection calls, etc.  

On the other hand, some definitions are so restrictive that they miss a large group of people we’d commonly think of as in distress.  If we define distress as declaring bankruptcy or even getting sued or called for collection, we miss all the people who are going without basic medications to pay their credit card bills or skipping meals to service other debt.  And, we miss all the people who do not declare bankruptcy but for whom it would be efficient to do so.

The two most common definitions that came up in law review articles were (1) having unmanageable debt; and (2) not being able to have your financial ends meet.  I think the first is a better definition because most measures of financial distress relate to debt (debt to income ratio; negative net worth; debt service ratio, etc).  But, because the concept is indeterminate and people accept both, I use both.

Using these two definitions, I started to think about whether fringe banking products cause financial distress.  Academics and policymakers often assert that they do.  And, the argument makes a lot of sense: Fringe borrowers are on the financial fringe already, and fringe banking products cost ridiculous amounts of money.  It seems likely that using fringe credit would cause distress.  But I don’t think so.

Continue reading "Fringe Banking and Financial Distress" »

What is Financial Distress?

posted by Jim Hawkins

I’m new to teaching, so a lot of times I encounter new terms.  I started working on a paper last year about the relationship between fringe banking (payday loans, rent-to-own, etc.) and financial distress.  I realized half way into the project that I really didn’t know what financial distress meant.  The concept comes up a lotSeriously, I mean really a lot.  But, it is not defined very often.

I’ve looked at the 300 or so times financial distress comes up in law review articles on Lexis, and I still am left without a clear sense of what the word means.  I’ve settled on two definitions for my paper, but I’m curious about what people mean when they say “financial distress.”

Overdraft Fee Regulation and the End of Free Checking?

posted by Adam Levitin

Ron Lieber has a thoughtful column about the future of free checking.  Consumers have become quite used to free checking over the last 15 years or so.  The impetus for the column is whether the Fed's new overdraft regulations, scheduled to go into effect in July (new accounts) and August (existing) accounts this year will change the financial equation such that free checking is no longer viable.

I'm skeptical.  The potential impact of the Fed's overdraft regulation impact is greatly over-hyped. 

Continue reading "Overdraft Fee Regulation and the End of Free Checking?" »

Unconstitutional Usury in Arkansas

posted by John Pottow

Did everyone see this news story from Arkansas?  It looks like usury is alive and well and coming after payday lenders.

Many Internet Payday Loans are Unenforceable

posted by Nathalie Martin

Internet payday loans are often even more impossible to pay off than storefront loans. Internet payday lenders are also among the most aggressive collectors, but maybe not for long. As it turns out, many of these loans are unenforceable.

First, why are they so hard to pay off? To get an internet payday loan, you need to share your bank account information, of course. Many loans are set up so the loan is automatically rolled over, unless the customer notifies the lender three days in advance of the due date that he or she wants to pay the loan off. I know of one consumer who mailed a certified check for the full amount, after the three day notice period but before the due date. The lender would not cash it. This happened repeatedly, making the loan virtually impervious to repayment in full.

If one gets caught up in one of these situations, the first thing to do is find a new banking relationship. Then what? Here is the good news. Payday loans made by lenders who do not comply with state laws cannot be enforced.

For example, all lenders (regardless of whether they are located inside or outside of New Mexico) loaning amounts of $2,500.00 or less to New Mexico residents must be licensed by the Director of the Financial Institutions Division and comply with all of the state rules and regulations regarding such loans. NMSA 1978 § 58-15-3(A). Payday loans made by unlicensed lenders are void and the lender has no right to "collect, receive or retain any principal, interest or charges whatsoever." NMSA 1978 § 58-15-3(E). Most if not all internet payday lenders have failed to register, or to comply with a bunch of other requirements, such as getting a license, providing a toll free number to New Mexico residents, and providing funding for the examination of their records by the public. Thus, it looks like these loans are uncollectible.

Consumption Is Too Important to Be Left to Consumers

posted by Mechele Dickerson

Professor George Ritzer, another sociologist (University of Maryland), presented a hyper paper ("Hyperconsumption" and "Hyperdebt": A "Hypercritical" Analysis). He argues that it has now become part of our public duty to consume. We were asked to consume after 9-11. We have been encouraged (really, really, encouraged – just ask WalMart) to spend the stimulus tax checks some of us might be receiving over the next few weeks. While consumers aren’t dupes, he stressed, we are being encouraged to do what producers want us to do.

Continue reading "Consumption Is Too Important to Be Left to Consumers" »

Are Payday Loans as Profitable as We Think?

posted by Paige Marta Skiba

No. These firms have ordinary profitability despite astonishing interest rates.

My recent study with Jeremy Tobacman finds payday lenders’ firm-level returns differ little from typical financial returns, notwithstanding their effective annualized interest rates of many thousand percent. Standard financial data (on stock returns and SEC filings) and loan-level data from a payday lender are consistent with an interpretation that payday lenders face high per-loan and per-store fixed costs in a competitive market.

Continue reading "Are Payday Loans as Profitable as We Think?" »

Why Do People Use Payday Loans?

posted by Paige Marta Skiba

Economic models of borrowing and saving offer a hat trick of (not necessarily mutually exclusive) explanations for why people would borrow on high-interest credit like payday loans: 1) Consumers may heavily discount the future, 2) Consumers may experience shocks that cause large, unanticipated variation in their immediate consumptions needs (such as car repair or emergency room visits), and 3) Consumers may have overly rosy forecasts (of either the shocks they will face or their own self-control).

Jeremy Tobacman and I recently put these three theories to real-world data on payday loan borrower behavior and found that behavior is consistent with people being at least partially naïve about their own self-control.

Continue reading "Why Do People Use Payday Loans?" »

Do Payday Loans Cause Bankruptcy?

posted by Paige Marta Skiba

Anecdotes about the effects of high-interest payday loans abound, but these correlations don't tell us about the causal impact of borrowing at 450% APR. Simply observing payday loan borrowers' in financial distress can't determine which direction the causality goes.

Jeremy Tobacman and I have found a clever way to sort out this causality issue and can answer at least this question: "Do Payday Loans Cause Bankruptcy?" with a decisive "Yes."

Continue reading "Do Payday Loans Cause Bankruptcy?" »

The Power of Numbers

posted by Elizabeth Warren

When the credit industry lobbied Congress for adoption of the bankruptcy amendments, they made a powerful claim:  Bankruptcy costs every American family $400.  The number was pure fabrication, but the number was repeatedly quoted in newspapers, magazines and in Congress.  It offered elected representatives a lot of cover to explain to the folks back home how they could vote to sqeeze more money from working families and put it in the hands of a dozen or so credit card issuers. Adam Levitin shows us that another number has been drawn out of thin air:  the Mortgage Bankers Association claims that any amendment to the bankruptcy laws to deal with subprime mortgages will increase mortgage rates for all homeowners by two percentage points--recently dropped to 1.5 points.  Adam is doing a great job fighting back, but, as it was with the $400, academics don't have the same PR machine.

Now there's a third data claim:  Payday lending is good for families. Once again, the claim is wrong, but the industry is pushing it hard in the media.  Maybe only a small part of the academic world realizes the importance of data in legal policymaking, but private industry seems to understand very well the power of numbers. 

Continue reading "The Power of Numbers" »

Academics Call It Optimism Bias, But We're Not As Funny

posted by Bob Lawless

A payday loan outfit offers several new alternative lending products on this YouTube clip. This payday lender will make loans against income streams other than a paycheck. I get the sense this clip may not stay up for long, so look at it while you have the chance.

Hat tip to my colleague, Cyndi Geerdes, for pointing me to this.

Predatory Lenders Unite!

posted by Elizabeth Warren

At last, a website for predatory lenders! A place to get together to swap ideas about how to maximize profits, tips on racial profiling, and ways to get around the new laws insulating military families from payday lenders. There is a handy fee calculator, so a novice predatory lender can make sure it getting the most out of its predatory loans. There's even a blacklist.

Most of all, this site combats the public's misunderstanding that predatory lending is bad.

Check it out. The site is wicked.

Can Payday Lending Help?

posted by Bob Lawless

In past posts, I have expressed my support for restrictions on payday lending and other high-cost forms of consumer finance. In the long run, the costs of payday lending would seem to swamp any short-term benefits it brings to the consumers who use it. A recent study by Professors Dean Karlan at Yale and Jonathan Zinman at Dartmouth challenges that sort of thinking. The paper is not going to change anyone's mind on either side of the debate, but it is a paper that people who want to think thoughtfully about the subject should read. Those looking for sound bites and simple answers will need to look elsewhere. Karlan and Zinman wrote an op-ed about the study in the Nov. 1 edition of the Wall Street Journal, but the full-text of the paper can be found here.

In a nutshell, Karlan and Zinman find that short-term lending at a 200% APR in a South African community made people better off than persons who did not borrow. Karlan and Zinman were able to randomly assign some people to get a loan or not to get a loan, which did not always work given that they could not control the branch managers' ultimate decision to give a loan. Although they can compensate for this effect mathematically, Karlan and Zinman are careful to note both the limitations and strengths of their experimental design.

Continue reading "Can Payday Lending Help?" »

Prospera's Experiment

posted by Bob Lawless

A few weeks ago, the New York Times ran a story (reg. req'd) about GoodMoney, a not-for-profit, joint venture between Goodwill North Central Wisconsin and Prospera Credit Union. Through GoodMoney, Prospera is trying to provide alternatives to the payday lending industry in the Appleton, Wisconsin, area.

How is Prospera doing it? Somewhat nonintuitively, they provide payday loans as an alternative to payday loans. As a not-for-profit venture of a not-for-profit credit union, Prospera is doing the best it can to provide a low-cost, nonpredatory alternative to traditional payday lending products. Still, it has to charge $9.90 per $100 it loans. Over a two-week period, the annual percentage rate (APR) on such a loan is an eye-popping 252%. Still, consumers will find Prospera's prices and credit terms a vast improvement over those offered by for-profit payday lenders. For example, Prospera's customers roll over their payday loans an average of only four times as compared to the industry average of seven. Also, Prospera works with its customers to consolidate their payday loans with lower-interest term loans.

Continue reading "Prospera's Experiment" »

From 20% to 2000% in One Generation

posted by Elizabeth Warren

Usury laws have been the workhorse of consumer protection, a tradition that intertwines both moral and economic principles.  The laws reach back to Colonial times in the US and centuries before in Europe.  Now Chris Peterson offers an empirical study of what has happened to usury laws in a single generation.

Instead of spending more time lamenting credit card companies' escape from usury regulation via Marquette, he focuses on what has happened to usury laws within the states.  After all, the multi-billion dollar payday lending industry now operates at the state level.  Peterson compares the state of usury laws in 1965 with what they look like today.  In one generation, in many states, this historic form of consumer protection has gone to hell. 

Continue reading "From 20% to 2000% in One Generation" »

Catching My Eye This Morning

posted by Bob Lawless

A few tidbits here and there catching my eye on a rainy Thursday morning here in Champaign:

  • The FDIC has approved a pilot project to encourage banking institutions to offer small-dollar lending products that would compete against the incredibly high-priced products offered by payday lenders and their ilk. Under the FDIC program, participating banks would offer loans of no more than $1,000, require mandatory savings components, have payment periods that extend beyond a single pay cycle, not impose prepayment penalties, and would have origination fees only in an amount that reflects the actual cost of originating the loan. When we talk about payday lending here at Credit Slips, the question is sometimes asked why mainstream lending institutions do not step into the gap. They are, slowly and carefully.
  • The New York state legislature has approved a bill banning universal default clauses in credit card agreements. As far as I know, the bill is still awaiting Governor Spitzer's signature. This move follows on the heels of a bill signed into law in Nevada also banning the clauses. Both pieces of legislation will have little effect, however, as they will be preempted by the National Banking Act.
  • In a prepared committee statement, Senator Charles Schumer signaled his intention to make his bill regulating mortgage brokers (S. 1299) a legislative priority (well, a priority right after they get done with the constitutional struggle of having the executive branch thumb its nose at the Senatre Judiciary Committee's subpoenas of yesterday). Consumer credit, be it mortgage debt or credit card debt, seems to be a hot topic on Capitol Hill. It looks like we will see some legislation coming out of Congress this term on the topic of consumer credit. Whether the White House will sign it will be another question.

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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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