Why would I lie about a thing like that? (Testimony in support of payday lenders)

This week’s action comes to us from the theater of the bizarre.  There was a hearing a few weeks ago before the Senate Financial Institutions Committee in Columbus.  The testimony was given by the Ohio Consumer Lenders Association (OCLA).    Their name sounds friendly enough.  But, they are not in the business of helping consumers.  They are what’s known as a trade association.  Meaning to say: they were created, funded and run by industry players – the lenders – or in this particular case the short-term lenders. 

What is a short-term loan?

A short-term lender gives money to consumers.  But unlike a regular loan, a short-term loan has to be paid in full within two weeks or a month.  At first blush their business plan might evoke sympathy, or at least tolerance.  They claim to be filling a need. (“These folks can’t get loans from banks.  So we make money available to them.”)  The problem is that because the money is due in such a short time, almost everyone who borrows it has to take out another loan right away.  This creates what is called the “cycle of debt.”  The lenders claim that the idea of a cycle of debt is overblown.  But most of the folks who get caught up in this mess have no choice but to re-borrow.

The bread & butter product of the short-term lending industry is a Payday loan.  (there are other product names, to be sure: Auto-title loans; check-cashers, etc.) Payday loans got their name because on the day you get the money, you write the lender a post-dated check for the entire payback amount.  The date on the check is the day the loan is due.  That is also the date of your next paycheck.  Industry hacks will tell you that payday loans are NOT designed to force the person who gets the money to re-borrow again and again. But, who’s kidding whom? (The average borrower spends over half of the entire year borrowing and re-borrowing)  Whatever “helping you out of a jam” looks like, this isn’t it)

What do these folks really stand for?

The website for the OCLA paints an interesting picture. They are (confused isn’t the word…..) painting themselves with an awfully broad brush.  Look, we’re not naïve, short-term lenders are in the business to make money.  They lend money to people who don’t have (or at least THINK they don’t have) any alternatives.  The loans are an incredibly bad choice for consumers.  And despite what the industry will tell you (or our legislature) the products are designed to force you to re-borrow, so that you have to keep paying the outrageous interest rates and fees for much longer than you ever wanted. 

 

Who is the OCLC

The mission of Ohio Consumer Lenders Association (OCLA) is:

To promote the common business interests of consumer financial services organizations operating in Ohio and to provide a forum for industry-wide consideration of the means for making credit available to middle class Ohioans on reasonable terms and conditions. OCLA works to promote laws and regulations that balance strong consumer protections while preserving access to a diverse credit market.

There is also other language on the site that sounds like they are incredibly reasonable folks. But, knowing what we know about payday lending, it sounds like they are talking about a different industry altogether.  It talks about “a code of best practices that provide appropriate safeguards for Ohio consumers,” and “appropriate debt collection practices.”  I wonder if what Ace-cash Express did to have to pay $10 Million in fines & penalties to the Consumer Financial Protection Bureau (CFPB), or what Cash-America did to incur fines & penalties of nearly $20 Million is what they are referring to when they say best practices?  (In case you’re wondering, these are two of the charter-members of the OCLA) 

They also trumpet the fact that they believe in “honest advertising.”  All we can say is: you have to make a pledge to use honest advertising?  Why is that even a thing? Yikes.

Editor’s new rule: Anytime you hear someone say that they are using “honest advertising” it means that you need to find somebody else to deal with. 

Let’s take a microscope to a typical payday loan transaction:

    • Step 1: I don’t have money today, so I go to a Payday lender.
    • Step 2: I borrow the money and give the lender a check for the entire loan amount (plus fees and costs) to pay them back.  The check is post-dated for my next payday. 
    • Step 3: The check that I wrote to the lender will clear, because it’s my payday. 
    • Step 4: Two seconds after my check to the lender clears, I am once again without money to pay the set of bills & expenses that came to my house in the meantime.
    • Step 5: Needing money to pay my bills, I take out another payday loan. We don’t know many people who can go without their next paycheck.   

Testimony

At the hearing that we mentioned above, the OCLA gave testimony extolling the virtues of short-term lenders.  As is the case with their website, the testimony had several moments that were interesting and some that were downright laugh-track worthy.   Their representative synthesized their mission into 3 bullets points:

    • The common business interests of consumer financial services organizations operating in Ohio;
    • To provide a forum for industry-wide consideration of the means for making credit available to middle class Ohioans on reasonable terms and conditions;
    • OCLA works to promote laws and regulations that balance strong consumer protections while preserving access to a diverse credit market

Point 1: seems simple enough – we work for the companies that lend money to consumers.

Point 2: starts out OK – we are here to teach everyone what our member-companies want.  It’s the last few words that lose us – “reasonable terms and conditions.”  Whatever you can say about payday lending and its spawn (check-cashing; auto-title lending; pension-advance loans) they are most-assuredly NOT “reasonable.”  I guess that reasonable-ness is in the eyes of the beholder. But, how is a loan that you KNOW you are not going to be able to pay back reasonable? 

And don’t get us started on interest rates.  If you are paying back $5,000 so you can borrow $3,000 that’s just too much money in interest (or fees, or whatever you want to call what it is costing you to borrow the money).  The industry plays this game by saying that the fees are not really interest.  Give the fees any name you want.  Here’s a trick: the next time you borrow money, write down what you are borrowing and then right next to that number write down the total amount that you will be paying the lender when it’s all over.  We’ll bet anyone a nickel that the you’ll be paying the payday folks more than any other lender.

Point 3: “…balance strong consumer protections while preserving access to a diverse credit market” is where the laugh-track should be running.  In Ohio, there are no such things as “strong consumer protections.” 

Editor’s note of jadedness: OK, we actually DO have the Consumer Sales Practices Act (CSPA), which USED to be one of the best laws in the country at protecting consumers.  But, in December, 2006 one of the last acts of Governor Taft was to mess with the damages provision of the CSPA to make it one of the weakest in the country and the legislature has been ice-picking away at its foundation ever since.  Pardon our skepticism.

Whatever you say about the state of consumer protections in Ohio and who really wants them to exist: the idea that the payday lending industry is in favor of protecting consumers is just made up.  We would bet that the member companies for the OCLA all have contracts that contain forced-arbitration clauses.  (these are the paragraphs in consumer contracts that make you give up your right to a jury trial, to discover information about how nasty the company really is, to tell anyone else about what happened, or to take part in a class action).  Forced-arbitration clauses are “consumer protections” the same way that solitary confinement can be described as one of the “perks of being a prisoner.” 

Other industry claims 

Since we seem likely to hear more about the virtues of the payday lending industry (after all, what’s the point of creating a new industry trade group if you’re not going to be blabbing all over the state about how great you are?), let’s review some of the arguments we know are coming to a legislative hearing nearest you: 

“We are just providing a service.  People want to borrow this money” – perhaps that is so.  But the same can be said about a crack dealer who is arguing for you to let him stay in business.  At the point where the product is too dangerous and causes damage to society, we need to step in.

“People would have nowhere to go to get money for their needs.” – Let’s take a look at what the folks at the Pew Charitable Trusts found when they asked payday borrowers what they would do for the money that they need:

Alternative source of $$  % of people who would use this source
Cut back on expenses 81 %
Delay paying some bills 62
Borrow from family/friends 57
Sell/pawn personal possessions 57
Get loan from bank/credit union 44
Use credit card 37
Borrow from employer 17

So, folks really do have other resources for funds to help them out of a jam.  And, notice that none of the choices above say: “take out the same loan again and again for 8 months.”

“We follow the law, when it comes to collecting money from our borrowers.”   Really?  Threatening borrowers with criminal prosecution, collection fees or non-existent negative reports to the credit bureaus; or calling employers & relatives and revealing personal financial information are all illegal.  Yet, is these very behaviors that have industry players paying hefty fines to the Consumer Protection Bureau.    

“It’s quick & easy! No credit check; No hassles.  You’ll have the money by the end of the day!”  These are all true. You will have your money quickly and they don’t much care if you have bad credit; good credit; or no credit.  Instead of seeing this as good news (“They’re gonna give me money!”) borrowers should see this as the ultimate red-flag.  Why? If somebody is going to lend you money without taking the time to see whether you can afford to pay them back, it’s because: 1) the interest rate and fees are so big, they’re gonna make at ton of money off of the folks that are able to pay; 2) they have you over a barrel and are sure they are getting it back one way or the other; or both.  In the situation with so many short-term lenders, it’s both. 

Hold onto your wallets everyone.   We haven’t seen the last of this.

Posted by: Mark Wiseman (who wants a law that requires a payday lender to ask “do you know a good bankruptcy attorney?” whenever they lend you money – just to make you think)   

The Big Banks’ exit from PayDay Lending is Great! (er..just OK) Point/Counterpoint

In the spirit of 60 minutes with a nod to SNL, Consumer Courage presents a Point/Counterpoint on the recent news that many major lenders have exited the Check Overdraft (and by association the PayDay lending) business.  

When ‘protection’ doesn’t really protect you

A few weeks ago, the news media were all a-twitter (or, maybe I should say ‘all a-flutter’ since Twitter is now actually a thing….anyway) were all a-flutter with the news that several lenders had formally disowned their previous predatory practice of giving overdraft ‘protection’ to their customers. (it was reported as an end to PayDay lending, which, as we will see acts in exactly the same way)    

What is overdraft ‘protection’ anyway? We are all familiar with what happens when a check bounces – you get hit with a $35.00 fee and your name goes on a list at the store where you wrote the check. 

Add ATM card and check-cashing cards into the mix and it gets a little more complicated.  Banks absolutely LOVE these cards, because they can charge you (and the merchant) all sorts of fees every time you use them.  Banks also realize that the more you used an ATM/check-cashing card, the more likely you are to forget exactly how much you have in your account.  When this happens, your accounbt becomes overdrawn.  But, since the overdraw may happen because of an ATM withdrawal, it’s a little hard for the bank to hit you with a bounced-check fee.  So, as a ‘courtesy’ to the consumer,  banks automatically sign people up for overdraft ‘protection.’  The protection is administered thusly: rather than let your check bounce, they ‘lend’ you money when the balance on your account finds its way into negative territory.  If you try to withdraw more than you had in your account or bounce a check, they cover the difference for you.  (“Go on………….”) 

They charge a fee to cover their expenses.  And you pay them back, when you get your next paycheck. (“Seems good so far……..”)   However, at some point banks realized that they could rearrange the order that your transactions were posted to your account, so it looked like you overdrew MORE often and incurred MORE fees. (“Wait…..What?”)  And, they realized that rather than just having the ATM say “insufficient funds to process request,” when you tried to take out more money than what you had available, they would just give you the cash without telling you that you were overdrawn and charge you fees and interest. (“You’ve GOT to be kidding me?”)   And, when it came time for you to pay them back, they would just swipe the overdrawn balance (plus fees and interest) from your next deposit and not tell you that your balance was even further in the RED, until you got your next statement. (“I give up!…..”)

Because this ‘protection’ was being put onto your account, without giving you the right to say ‘I don’t really want it;’ because the interest rate was so high; and because many people were forced to keep borrowing money from the bank to cover the shortfall that was created by the fact that they paid themselves back from your next deposit (again without permission), these ‘protection’ loans were referred to as a type of PayDay lending.  Since lenders are not required to report the number of these ‘protection’-type loans that they give out, the exact size of the market for overdraft loans can only be estimated.  But, according to the Consumer Financial Protection Bureau (CFPB), in 2012 the lending industry benefitted by overdraft protection programs to the tune of $32 Billion.      

It’s understandable why Consumer advocates were up in arms about these loans.  Account-holders were being lent money at interest rates that they didn’t know about and at times when nobody would agree that it was a good idea to use the ‘protection.’ (For example: it was not unusual for somebody who had $19.50 left in their account to ask for $20.00 from the ATM machine.  Instead of saying “you have insufficient funds for this withdrawal,” the machine would dispense a crispy new $20.00 bill.  For the right to overdraw their account in the amount of fifty cents, the borrower would be hit with a $35 overdraft fee and $15 in interest.  Then, when the borrower made their next deposit, the bank would have the right to take $50.50 off of the top of the consumer’s account, without warning.

Until recently, nearly every major bank offered this overdraft ‘protection.’  Because new regulations issued by the FDIC and the OCC make it harder for banks to take funds from your accounts, the major lenders started dropping their overdraft ‘protection’ programs one-by-one.  Is it good?  Certainly.  If banks have fewer ways to nail you with fees that you don’t know about and can’t negotiate, it’s always good.  But, how good is it?  Reviews are mixed. 

Editor’s confession: thus far, it appears as if Consumer Courage is the only one who remains skeptical about this news as being a ‘victory’ for consumers.  This is reflective of the malady, which is referred to by the official wife of Consumer Courage as “Maybe there’s a reason nobody else agrees with you.” But, I digress……….

POINT:  It is great news that the major banks are out of the ‘PayDay’ (Overdraft ‘protection’) business.

Presented by David Rothstein, Director of Development for NHS of Greater Cleveland

Consumer Courage dedicates a good deal of time warning against payday loans. With good reason, given the high interest rates, balloon payments, and cycle of debt that payday loans carry. Not to mention, they are not legal in Ohio! For more on that, please see previous policy reports  I wrote while working for Policy Matters Ohio.

Friday, January 17, was a banner day for advocates against payday lending. Three national banks ended their deposit advance programs, which function like payday loans, allowing account holders to borrow against their future direct deposits. Talk about a debt trap!

We are all for financial institutions offering small dollar loans but without looking at the ability to repay and offering sufficient time to repay, the “early access” and “account advance” programs were costing hundreds of dollars to consumers. What’s more, if banks can escape state usury caps with high-cost loans, we open up a wild west for lending. Some states (like our neighbors in Pennsylvania, New York and West Virginia) regulate payday loans. Ohio has a law that restricts the APR on payday loans to 28 percent or less – but it is not enforced.

This begs the question: Why we are so excited about big banks getting out of the payday business? If federally chartered banks are allowed to offer usurious loans, it renders state laws useless. It gives mega-bandwidth to payday lending with more accounts and marketing power than the traditional storefront lenders. It also provides a direct link from the loan to a bank account through direct deposit from an employer or government assistance. Everyone stepped on this one. From advocates to the bank regulators, we worked hard to address bank payday before it spread to become as common a practice as ATM withdrawals.

COUNTERPOINT:  It is (not particularly) great news that the major banks are out of the ‘PayDay’ (Overdraft ‘protection’) business, because they are still providing capital to the PayDay lending industry.

Presented by Mark Wiseman, Director of the NHS Consumer Law Center.

Thank you David for setting the stage.  It’s wonderful that the major banks have stopped offering overdraft protection programs.  But, color Consumer Courage as skeptical.  Banks have made $Billions on overdraft ‘protection’ programs in the last few years.  Does anybody think that they are just going to walk away from that kind of profit?  In truth, they have been in the PayDay business for many years, even if they don’t have a window at the bank that says “PAYDAY LOANS HERE.” 

How have they been doing this?  Most of the major lenders have been providing the cash that is used by the storefront PayDay lenders in their regular course of business.  According to the Center for Responsible Lending, the average Payday loan comes with an interest rate of 300%, and its terms force the typical borrower into the ‘cycle of debt’ where they have no choice but to take out 8 – 10 PayDay loans in a row.    

According to this report from National People’s Action, the five major lenders (Wells Fargo, JPM, PNC, US Bank, Bank of America) issued lines of credit to the PayDay lending industry.  In 2010, these lines of credit covered 38% of the entirety of the industry.  These lines of credit are the oil that makes the PayDay lending industry run.  If they can’t borrow money themselves, there will be no cash to lend to the consumers who walk into their stores.  

Is PayDay illegal in Ohio?

Well, yes and no.  The Ohio Legislature enacted a statute in 2008 that was intended to put a rate-cap on the PayDay lending industry.  They were following the Federal model that capped PayDay loans to military personnel at 36%.  Unfortunately, as that law was being passed in Ohio, the PayDay industry was busy registering their businesses under Ohio’s Second Mortgage Act and the Mortgage Lending Act, taking advantage of a loophole that was created by all of the carve-outs that had been placed in those statutes.  And even though 68% in the entire state of Ohio voted to cap PayDay loans at 36%, they still lend money to consumers at interest rates in the neighborhood of 400%.  

The Ohio experience has jaded those of us advocating for Consumer rights.  It seems that no matter what victory we claim, it’s practical effect is short-lived.  (Many of us are still suffering from a loss of cognitive function caused by the concussive effects of the ‘Homebuyer’s Protection Act of 2006’)  While we read about the Banks being ‘Out of the PayDay loan business’ we still drive by several PayDay lending storefronts on our way to work every morning.  As if on cue, here’s the first indication that the banks have already started planning their re-entry into the PayDay market.  

“We are used to making this money”

Before the CFPB was created, the Federal Reserve in Washington, D.C. used to convene a  ‘Consumer Advisory Council,’ once every quarter to discuss emerging consumer issues and provide some insight for the Board of Governors about the state of Consumer Law.  Consumer Courage served on this panel with many wonderful Consumer Advocates, along with some professionals who represented the interests of the banking/lending world.  During one such meeting, the Federal Reserve was mulling over whether to tinker with a fee (a so-called ‘Exchange fee’) that credit card companies charged to business that processed credit card payments.  The total industry profit from this particular fee was between 8 and 9 Billion dollars.  In opposition to the change, one particular gentleman (who was the National portfolio manager of a rather large credit card company) told the Chairman of the Federal Reserve and the Governors who were at the meeting the following: “We are used to making this money.  You can’t make this change.  If we have to figure out where we are going to replace this income, we are most likely going to have to stop providing free checking to the poor.” 

And there you have the seeds of our skepticism.  That an industry executive is able to think to himself “well, if they mess with my bottom line – forget the reason – I’ll just zing all the poor people I can find,” is outlandish.  That he felt comfortable to transmit those thoughts to the people who design and implement the monetary policy for our entire Country shows an arrogance that is beyond description.   Feel free to cheer this news……………..while it lasts 

Posted by: David Rothstein and Mark Wiseman (who have never been insulted by Dan Akroyd)

Why Fast, Easy & Reliable isn’t always good (how a Payday ad campaign is bending the truth)

For some reason, Consumer Courage has been seeing a lot of ads for PayDay lenders.  They claim to be ‘there for us’ and seem to be really nice people.  But, are they?   First a little background. 

What exactly is a PayDay loan?  

PayDay loans are short-term secured loans.  Short-term, because the lender expects to be paid back in less time than a conventional loan.  Conventional loans have a life-expectancy that is described in terms of years.  Short-term loans take way less than that.  PayDay loans are designed to be super-short (usually not longer than 15 days – which is the same amount of time it will take the borrower to get his next paycheck).  Payday loans are designed to take advantage of the most vulnerable among us.  Two-thirds of PayDay borrowers make less than $30,000 per year, while a third have a yearly household income of between $10,000 and $20,000. 

The loans are ‘secured’ – which describes when the lender takes a legal interest in some identifiable thing that they can get their hands on, if the borrower doesn’t pay.  The security in this case – the Borrower’s next paycheck – is not what is typically described as security for a loan. 

Editor’s legal-beagle note of pickyness: there are some who might say that making you sign over your paycheck does not qualify as ‘security’ in the strict sense of the legal definition.  They’ll get no argument here. But, for purposes of this post and to increase understanding of how the borrower who takes out a PayDay loan loses any meaningful choice about how to pay the loan back, Consumer Courage will invoke a tad bit of linguistic license.

Since they can’t put a lien on your paycheck (which is what they do with a car loan or mortgage) the borrower is required to create this security themselves.  When you borrow money from a Payday lender, you give them a post-dated check for the repayment amount of the loan.  The date is, of course, the date of your next paycheck. What will you do for money, when your next paycheck arrives and you have to give your money to the PayDay lender? This is the question they hope you will never ask.  What will happen is that you will have no choice but to take out another PayDay loan, entering into what is called the ‘Cycle of Debt.’  (I know what you’re thinking: “What if I just cancel the check?” You could.  But stories of how vicious PayDay lenders are when they have to call you to collect their money are the stuff of legend)

This cycle is so predictable and so profitable, it drives the PayDay industry.  They get you hooked and then make a ton of money, because you are unable to stop using their product.  (For those of you keeping score at home, this is the exact premise that the Crack industry is based on – with one notable exception – selling crack illegal in Ohio, PayDay lending is not)  Let’s take a look at the claims their ads make and see if we should get a PayDay loan. 

“I have poor credit and cannot get a traditional loan…. They have been there to pay the bills, when I can’t get money from traditional Banks……..

This claim implies two things – That your credit score has nothing to do with whether you should be taking out a loan and that the PayDay lender is there to help, much like an old friend. We’ll take the second point first.  PayDay lenders (and any lender for that matter) are not giving you money because they just “LOVE YOU.”  They are lending you money, because you are going to pay them back MORE than they gave you.  So much more, in fact, that they will spend money in advertising dollars, lobbying dollars, and promotional dollars to get you and more people like you to use their services over and over again.  

The first point, that people with bad credit are somehow getting around the banks silly requirement that they have good credit, is a common bit of bogusness. There is an ad across the street from Consumer Courage’s world headquarters that says “We lend money to people, not credit scores!”  Perhaps.  But, those very same people in the ad are going to make sure that you can pay them back.  If you have bad credit, they are going to make DARN sure.  How? By having you sign your paycheck over to them and by guaranteeing that you’ll have to take out a new loan in two weeks. 

If a lender wants to take time to figure out whether you can afford to repay a loan, it’s not just some bookkeeping nonsense that you should try to avoid, it’s for your own good.  If you can’t repay a loan, you will get sued and might even get your wages garnished.   If someone is willing to lend you money without looking at whether you can afford it, it should set off alarm bells in your head.  (In Ohio, if the lender gives you a mortgage without first figuring out whether or not you can afford it, they have violated the law.  Unfortunately, it’s not the same with PayDay lending) 

“Instead of having three bounce fees w/my bank, I have ONE repayment fee that was a fraction of what my bank fees would have been………

The fee for a single Payday loan, might actually be less than a bunch of overcharge fees put together.  But, when you consider that 75% of the people who take out a payday loan take out between 11 and 20 loans in a row, this claim is more than a little misleading.  Also, check bounce fees are not an inevitable fact of life.   Almost every bank offers some kind of overdraft protection for checking accounts.  Call your bank and see what you have to do to avoid overdraft charges. It might be cheaper than you think. 

“This PayDay lender is the best.  There are no hassles, no hidden fees and they always got the loan the very next day into my account……

If you are shopping for candy-bar, Consumer Courage recommends going someplace where there are no hassles and where you can get the candy as quickly as possible. If you are going to borrow money and then sign a stack of papers that gives the lender permission to swipe your next paycheck, perhaps quickness is not the most important consideration.  Because their business model is based on tricking you into giving them repeat business by holding your paycheck hostage, this claim should sound more like bad news than a selling point.   

“When I applied, they gave me all the payment details up front and that’s all I paid back.  No hidden fees of any kind…….

Just to be sure, let me give you the details now about every PayDay loan you will ever see:

If you take out a PayDay loan, you will pay back the loan, which will have an interest rate that is way too high and you won’t be able to stop, because your next paycheck will be gone. 

As for the claim that you will get the details ‘up front’ and that there will be ‘no hidden fees,’ I wouldn’t be surprised if it were true.  But, a few other ‘details’ make these claims nonsense.  First, they can give you a list of the fees in itty-bitty print on the back of the contract.  They will not be ‘hidden’ in the technical sense. What they will be is outrageous, high and a total ripoff. 

Second, just because they show you the fees, doesn’t mean that you’ll have a choice.  Try this for fun, if you sign a contract for a PayDay loan.  Cross out the fees that you don’t want to pay (like the ‘check-cashing fee’; the ‘processing fee’; and the ‘licensing fee’) and see whether they give you money, or kick you out of the store.

“PayDay lender is always there for me, when I need a loan.  The money is in my account the next morning.  And the best thing is, I can do the whole thing online with no phone calls and or faxes……

A friend who helps you change a flat tire at midnight on a lonely road; who watches your dog, while you take your sick kid to the emergency room on a Sunday afternoon; or who gives you a ride to and from work, while your car is at the shop is ‘Always there’ for you.  Somebody who gives you money, only if you sign your paycheck over to them is USING you.  There’s a difference.

“Fast…..easy….reliable…..

Fast?……You bet.  Easy?…….Check.  Reliable?……………I’d say.  A good idea?  Not on your life.

Posted by Mark Wiseman:  Who would gladly watch your dog. (the flat tire at midnight thing might be a little harder to arrange………..) 

We’ve never met, can I have your money? (Should you pay a bill that you DON’T owe?)

Earlier this week the FTC issued a press release about an injunction they obtained in Atlanta against 14 parties (9 companies and 5 people) to get them to stop violating Federal Law.  What did the bad guys do?  In the FTC’s words, they: “used deceptive and threatening tactics to collect phantom payday loan “debts” that consumers either did not owe, or did not owe to the defendants.”

The word ‘debts’ is in quotes, because the money that they were collecting was not actually ‘owed’ in the traditional sense.  Meaning to say: they put together a list of people who fit the profile of somebody who might use a PayDay lender and called them.   The game was to get the Consumer to admit that they had gotten PayDay loan in the past, then pretend to be calling about THAT loan.  If the bad guys were really good at their jobs, they could scare, threaten and belittle the Consumers into believing that they actually owed money. 

How did it go?

We imagine that the conversation went something like this:

Caller: Hello, Mrs. Gullible, we’re calling about the loan that you are behind on.
Mrs. G: I don’t understand, my bills are paid up.
Caller: Sure, maybe NOW.  But, you owe WFU finance on the loan that you USED to have.
Mrs. G: Who?
Caller: That’s right. The balance is $582.16 and we’re giving you one last chance to pay, before we garnish your Social Security check!
Mrs. G: Well, I did have a loan with a PayDay lender years ago, before I moved.
Caller: So now you remember? Yes, and we found you!  Usually we’re aggressive (you know bringing the Sheriff in to help, calling your employer and having you put on double-secret probation at work, that sort of thing) But, you sound reasonable, I’m sure that you want to take care of this now.  Of course you understand, I’m not saying you’re GOING to be arrested.  We just want to take care of this as soon as possible
Mrs. G: O……K…..I don’t want trouble.  Let me get my checkbook
 

Do people actually fall for this?

You’d better believe it.  Combine the deep-rooted desire that most people have to want to pay their bills, the angst that is created when someone hints that you might be arrested and the gullibility that makes some folks actually return the Publisher’s Clearinghouse paperwork  (no matter how long it takes) and you have the perfect recipe. (remember, scam artists who spend their time on the phone trying to trick people don’t need EVERYONE to fall for it – they just need one)

After all, the FTC press release points out that this is the fifth case they have brought to stop people from collecting on so-called ‘bogus’ debts.  [we don’t know what’s scarier about this little tidbit of info – the fact that the Federal Government had to seek a Court order to stop this, or the fact that this is the FIFTH time they had to do so!]

There outta be a law……….

In fact there is. (sortof)  The Fair Debt Collection Practices Act (FDCPA) protects Consumers from debt-collectors from using abusive or deceptive tactics (among other things) when trying to collect money that you actually owe.  And the FTC Act (also part of this case) prohibits “unfair or deceptive acts or practices in or affecting commerce.” 

Leagle-beagle-mumbo-jumbo note: The FTC sued under BOTH of these laws – in somewhat of a hedging of bets.  While FDCPA covers debt-collection, it makes no mention of collecting on a debt that doesn’t exist.  The argument that ‘you see your honor, Fair Debt doesn’t apply to my client.  He may be a scumbag. But, he’s no debt-collector!’ wouldn’t make your Mother proud.  But, it would probably win the case that alleges that you violated FDCPA (without mentioning any other law)

But, just knowing which laws protect you (and how) doesn’t do much good, if you aren’t strong enough to say NO to the next scam artist who calls you at home. 

It’s like the scene in the first Indiana Jones movie.  Harrison Ford runs into an Arabian Knight who starts waving a cutlass around, like he’s going to carve him up.  Just when you start to think that the whip that Indy carries around isn’t going to save him, he grabs his gun and cuts the bad guy down.  In our case, you’re the Arabian knight and the fancy giant sword is the FDCPA and your consumer rights.  You can waive it in everybody’s face (and tell them about your consumer rights) all you want.  But, their ability to trick you into paying them acts just like the gun in the Indiana Jones clip.  You have all of your rights………. and they have your money.

So what can you do?

Be careful!  And take a few simple steps to make sure that you don’t fall for the ole ‘let’s pretend that you owe us money’ scam.

OWE ME THE MONEY! – (or something like that) if anybody ever asks you to pay on a bill, make them prove (in writing) that you actually owe them money.  The first words out of your mouth should be “send me proof that I owe you money.”  If they say anything other than, “OK, I’ll send it tomorrow,” something’s wrong. The law says that they have to send you proof of the debt and how much it is.  You should not be paying a dime to anyone, before you see:

    • A bill (not a statement that just has a balance due) Something with proof of actual charges that you made;
    • Written proof that whoever is calling you has some legal connection to the company they say you owe money to; 
    • Some information that shows that this is really YOUR account (date it was opened, charges made, proof that THEY are chasing the right person, your date of birth…)

WHAT DO I NEED TO SEE? – For starters, here is a list of demands. (If the word Demand seems a little harsh, remember: someone else wants your money, it’s OK to be HARSH!)

    • Demand that the person calling you (or sending you a letter) identify themselves AND the original creditor;
    • Demand that they send you a copy of the original contract;
    • Demand that they tell you three things about the debt:
      • How much is the principal;
      • How much is the interest; and
      • What is the interest rate that they are charging 
    • Don’t give any information over the phone, before you see a letter verifying that the collector is legit.

AND, WHO ARE YOU AGAIN? – Scam artists tend to talk fast and use confusion to get you to submit.  They want to keep the focus on you (and on whatever lie they told to try to scare you).  They also get really squirrely when people ask details about THEM.  So, switch the tables and tell them that you want to know their: full name, company name, street address and phone number.  Then, politely say “Thanks, now I have to look you up on Google.”  (Try Googleing the company name and ‘Ripoff’ or ‘Scam’)

CLICK……OOOOOOOOO – that’s what a hang-up sounds like (or, that’s what it sounded like when I was a kid, anyway) This is your best weapon against a scam artist on the phone.  They can’t take your money, if you are not on the line.  If you even think that the person on the other end of the line is up to no good, utter those three words that they are powerless against “Thank you……Goodbye.” 
There’s no law against hanging up on somebody you think is trying to pull a scam. Don’t be shy.

Posted by: Mark Wiseman (who had a friend tell him “if you ever hang up on somebody, do it while YOU are talking. That way, they’ll think you just go disconnected.  After all, who hangs up on themselves?”)

The Other Shoe Drops on Payday Lenders

Today, the Consumer Financial Protection Bureau released a White Paper that discusses PayDay Lending and Deposit Advance Products.  It is no secret what the advocate community thinks about PayDay Lending.  In fact, if you visit the website for the Center for Responsible Lending, you could learn a lot about how the industry works and whether the nickname “Legalized Loan-Sharking,” is deserved: 

2003: That PayDay Lending stripped Billions from the economy;  

2008: That PayDay Lending had an unusually high impact of wealth-stripping in communities of Color;  

2009: That PayDay Lending was a mere stepping-stone to bankruptcy and financial ruin;

2011: That PayDay Lending was the entry door to long-term, unmanageable debt;   

In case you prefer more recent data, David Rothstein has looked at the CFPB’s White Paper and opined about what it all means.  His post (which first appeared on the New America Foundation’s website) is below, in its entirety:

As it turns out, consumer advocates might have underestimated the impact of payday loans on consumers. We have written pretty extensively about the debt trap or cycle of borrowing that short-term, high-cost loans have on consumers. We are now getting real data and first impressions are that it is worse than we thought. The good news is that federal regulators are poised to take action. The recent, incredibly detailed report  by the Consumer Financial Protection Bureau (CFPB) revealed that the average consumer takes out 11 loans per year, paying $574 in fees (not including the principle balance). A quarter of borrowers paid more than $700 in fees. The argument that emergencies arise and people need short-term access to credit just doesn’t hold water with this latest data. Check out their infographic illustrating their findings. We blogged earlier about Pew Charitable Trust’s research that found recurring expenses accounted for the vast majority of payday borrowing. So, if someone is drowning…do you throw them a life preserver or a brick? The next step after data analysis is action and the Washington Post is reporting that the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) will be issuing regulations on bank payday loans or direct-deposit advances. Bank payday loans are problematic for all the reasons that storefront loans are troubling but also because they squeeze in between state usury laws on small dollar loans. Included in this guidance, we are hoping to see mandatory “cooling-off” periods between advances, disclosed APRs, and what the heck, some underwriting standards that take into account the ability to repay. This is the beginning of what could be a very hot summer for payday lenders.

Posted by: David Rothstein

Mythbusters: Payday Lending Version

Last year I analyzed four myths about payday lending that the Pew Charitable Trust’s “Payday Lending in America” project was able to disprove, in the first iteration of their study on borrowers. Their newest report “How Borrowers Choose and Repay Payday Loans: Payday Lending in America” goes into more depth, revealing a love-hate relationship between borrowers and high-cost, short term loans. The report tells a conflicting story of dependence, need, stress, relief, and any other emotion associated with finances that you could think of. Borrowing from the Mythbusters theme again, here’s the skinny on Pew’s new report.

(Editor’s Note: David wrote a blog post, when the first PEW report on PayDay loans came out last year.  For those who are interested in seeing how he dissects the fundamental myths behind PayDay loans, you can go here to check it out.  It’s worth the click)

Myth 1: Payday loans are mostly paid back.

Truth: There is some ‘truthiness’ going on here. Pew’s recent study finds that borrowers renew their loans or take out back-to-back loans in order to prevent defaulting. Only 14 percent of payday borrowers can repay their loans from a monthly budget. At some point, most borrowers inevitably default, require a cash infusion from family or friends, or use a tax refund (1 in 6) to pay off their loan debts.

Myth 2: Payday lending is an alternative for overdraft fees from checking accounts.

Truth: More than ¼ quarter of borrowers stated that payday loans caused their overdraft fees. The loan and overdraft fees are not mutually exclusive.

Myth 3: Borrowers think the terms are fair.

Truth: Again, there is some degree of truthiness about this. It is less about fairness but more so about ease of access, desperation, and perceptions. Some 55 percent of borrowers reported that loans take advantage of borrowers. What’s more, perhaps the most revealing finding is that 37 percent would borrow on any terms.

When people get desperate, it’s no surprise that they’ll do desperate things. The overall challenge with payday lending is that families lack income and assets to support themselves. As one borrower remarked, this relationship between borrower and loans is sweet and sour. Sweet when there is some immediate relief; but sour after the loan is made. Payday loans turn out to be a real problem for most customers, but the root here isn’t these terrible products. The root of the problem is the inability to earn income, set aside assets and build financially secure households. Fighting off the worst terms of the worst products is just a delaying measure until we can fix the structures and systems that aren’t serving the American people very well.

 Posted by: David Rothstein

 

Auto-title loans: Finally – a way to lose your car AND your money!

There is a new fantastic report out from the Center For Responsible Lending in North Carolina, called “Driven to Disaster: Car-title lending and its impact on Consumers,” which explains why Auto-title lending is a horrible idea and why the only people that those loans benefit are the people who own the storefronts.  What is an auto-title loan?  Simply put, it’s when someone who cannot qualify for a loan anywhere else (because they have bad credit, not enough income, ZERO income, too many debts, prior bankruptcy, etc.) can get cash, just because they own their car.  The auto-title lender determines how much the car is worth and then lends the borrower money, based on that amount. The borrower only has to give them the title to the car and an extra key (the key is so that they can threaten to take the car, unless you do whatever you can to pay the loan back in 30 days)

There is a Seinfeld Episode where Jerry accuses his dry-cleaner (with whom Jerry has stored his Mother’s fur coat for the summer) of letting his wife wear the coat out, as if it were her’s.  The dry-cleaner says to Jerry, innocently, “Jerry, we can’t wear the coat.  It’s against the Dry-cleaner’s code!”  to which Jerry replies “You need a code to tell you not to wear other people’s clothes?” 

That’s the way I feel about this report from the CRL.  “We need a report to tell us that Auto-title loans are a bad idea?”   Sadly, we do.  Unfortunately, there is no law in Ohio that prevents Auto-title lenders from operating.  (They are not given specific permission to do this, either.  But, the laws that govern short-term lending in Ohio are so intertwined and convoluted, the loopholes have become the rule, rather than the exception) 

The CRL report, shed light on how insidious these loans really are. (Click HERE for a full PDF of the report) The most alarming fact is the revelation about the actual size of the auto-title lending industry.  There are almost 8,000 auto-title lenders in the U.S.  The yearly interest payout for all of these loans combined is $3.6 Billion.  This figure isn’t shocking by itself.  But, when you consider that the total principal amount for the loans is only $1.6 Billion, this shows that the average interest rate is at least 225%! 

How anyone can justify an interest rate that is over 200% is beyond the understanding of anyone at Consumer Courage.  (Side Note: The CRL study does not list Ohio as one of the 21 states that permits Auto-title lending.  Probably because there is no specific law that sanctions the practice and because it is such a new phenomenon within our borders) Incredibly, one of the things that this report found was that the lenders typically will only lend somebody an amount up to 25% of the value of the car!  So, the borrower isn’t even getting his money’s worth.  

Want more outrage?  The CRL also found that the typical borrower renews their auto-title loan eight times, while paying $2,142 in interest for a mere $951 in credit !  So much for the industry claims that these loans are available to help people through bad times and cash flow problems.  And, what is the fate that awaits 1 out of every 6 borrowers of an auto-title loan?  Repossession.  That’s right, 17% of everyone you see walking out of an auto-title lender with a wad of cash will be saying good-bye to their car in short order.

Here are a list of CRL’s policy recommendations (in the author’s own words): 

• States should not grant exemptions to their existing annual interest rate limits on car-title loans.

• Car-title lenders often argue that their loans are short-term, making annualized limits inappropriate.

• According to our findings, most loans are renewed multiple times and last nearly a year. There is little direct evidence that access to high-cost, long-term debt is beneficial to the borrower.

• Like any consumer loan, car-title loans should be structured and priced based on an evaluation of the borrower’s ability to repay the loan. Some lenders appear to underwrite based solely on the value of the asset—in this case a car—which is a well-established indicator of predatory lending.

• Borrowers should have adequate protections in the event of a default. Such protections include notice prior to repossession or sale of the vehicle, a right to redeem the vehicle, and a ban on deficiency balances.

• Policymakers must remain vigilant in enforcing their state lending laws. Like payday lenders, car-title lenders are often aggressive in exploiting any legal ambiguity to push their defective product into the market.

Posted by Mark Wiseman

Just when you think you’ve seen everything…(Why you should NEVER borrow money from Western Sky Financial)

There is a new radio ad making its way around the airwaves in Cleveland. The ad promises to have “money in your account overnight.” (I haven’t seen their TV ads in Northeast Ohio, yet. But, here’s a taste)   On the surface, it sounds like any other PayDay (or short-term) lender and then, the voiceover says something that I have never heard a short-term lender admit before: “Yes, it’s expensive.”  Hmmm, I thought.  What an interesting twist.  Usually, PayDay lenders will go to great lengths to argue how they are not really charging 400% interest.  But, here they were, admitting that the loan was indeed expensive.

The ad is from a company called Western Sky Financial.  Since I’ve never heard of them before, I decided to do a little digging.  What did I find? Well, for starters, the loans aren’t what I would call ‘expensive.’ They are what I would call ‘UNBELIEVABLY, INCREDIBLY, COVER-YOUR-EYES-IN-SHAME EXPENSIVE!’  As if that wasn’t bad enough, there is more than one reason why these loans are downright shameful.  

First things first, the ad claims that they are not a Payday or Short-term lender.  Since a PayDay lender is a company that makes the borrower submit a check for the repayment amount that is dated for his next payday (and since Western Sky Financial doesn’t require this) I’ll agree that they are not a PayDay lender.  And, since a short-term lender is a company that requires you to repay the loan in 30, 60 or 90 days (my definition), they probably can’t be classified as a ‘short-term lender,’ either.

But, don’t be fooled.  Their choice not to make PayDay loans doesn’t look to be voluntary.  This is because Western Sky Financial and the man who appears to own and operate the company, Martin A. Webb (along with 7 other ‘tribal lenders’ that he is affiliated with) have been sued by the FTC.  The complaint alleges that the tribal-based PayDay lenders tried to garnish the wages of borrowers who hadn’t paid, using illegal tactics.  And that their business model is deceptive, because the loan agreements forced the borrowers to agree to be bound by the Cheyenne River Sioux Tribal Court

In any case, the interest rates that they list on their website are so high, it doesn’t much matter what you call them.  The lowest interest rate that they list is just over 89%. (That’s for the loan with the longest term and the highest amount – 7 years/$10,000). The highest rate listed is just under 343%. (That’s for the shortest loan term and the smallest amount – 1 year/$500) Here’s a chart (taken from the information on their website)  that lets you compare their loan amounts, payment amounts and interest rates.  Notice the astronomical difference between the amount of money that you borrow (the first column) and the TOTAL amount of money you would have to pay them. (the second to last column) 

        

 How much you borrow  APR   Number of Payments  Payment Amount  Total $$ Paid   Amount of INTEREST Paid
 $10,000.00  89.68%  84  $743.49    $62453.16   $52,453.00
 $5,075.00   116.73%  84  $486.58   $40872.72  $35,798.00
 $2,600.00     139.22%  47  $294.46   $13839.62   $11,240.00
 $1,500.00     234.25%  24  $198.19   $4756.56   $3,257.00
 $850.00   342.86%   12  $150.72   $1808.64   $959.00

Which brings me to the main point of this post:

DON’T EVER BORROW MONEY FROM THESE PEOPLE!

To be sure, the ad says “there is no penalty for paying early,” Which is true.  If you repay the amount that you borrowed early, you won’t have to pay the entire interest amount.  But, who are they fooling?  Almost everybody who would get one of these loans will never be able to pay them back early.  That is why they are going to a place like Western Sky Financial in the first place. 

But, aren’t I protected from abuse? Don’t they have to follow the law?

Sort of.  It’s clear by the agreement that Western Sky Financial has signed with the FTC, that they believe that they are bound by Federal Law.    And, since they don’t lend to anybody from California, Colorado, Maryland, South Dakota and West Virginia, they must agree that those particular states have the ability to prevent them from abusing their residents, as well. (Click here for an article describing the efforts taken – and the consent decree obtained – by the Attorney General from West Virginia)  It appears as though Western Sky Financial claims that because they are located on an Indian Reservation, they have ‘sovereign immunity’ and don’t have to follow any State Laws. However, this does not appear to be valid, because they are owned by one person, rather than being a business that is owned and operated by the entire tribe.   However, the fact that they have taken their PayDay lending model and are using it to lend larger amounts of money (for longer terms) in the other 45 States, shows you that they don’t seem to be worried about whether their lending or collections practices violate any other laws. (Yet another reason to run from their ads….)     

Well, can’t I sue them on my own?

You can try to sue them. BUT, the contract you sign will contain the following paragraph:

All loans will be subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation. All borrowers must consent to be bound to the jurisdiction of the Cheyenne River Sioux Tribal Court, and further agree that no other state or federal law or regulation shall apply to this Loan Agreement, its enforcement or interpretation. (hidden on their website under a footer, entitled ‘Terms of Use’

Even though I’m an attorney, I will admit that I don’t know the first thing about the ‘laws and jurisdiction of the Cheyenne River Sioux Tribe.’  But, I can guess a few things. I would guess that to present any kind of defense, you have to actually go to where the Cheyenne River Sioux Tribal Court meets (Their contact address is: Western Sky, 612 E Street, Timber Lake, SD, 57656.  Whether this is where the tribal council meets is anybody’s guess) I would also guess that the rules that protect someone who is being sued for an overdue bill in the Courts of Ohio (discovery; ability to depose the creditor; the right to be served with every filing; ability to obtain information about your case and others like it before any hearings; the right to present the case to a jury of your peers, etc.) do NOT apply at the Cheyenne River Sioux Tribal Court.  But, do you really want to be the person who has to fly to South Dakota to find out what happens at their tribal council?

So, what if I really need the money?

Almost every way to borrow money that I can think of seems better than using this company.  To be sure, every way to borrow that I can think of is LESS expensive than this place. (and, you won’t have to go to South Dakota to argue your case, if things go bad) How do you protect yourself from these folks?  Try following the old adage: if you find yourself in a hole….quit digging.  Meaning to say: no matter how bad your situation is, it’s nothing, compared to how bad it could be, if you borrow money from Western Sky Financial.

Posted by: Mark Wiseman

 

Don’t click on that Spam!

Question for the day: Would you know when NOT to open an e-mail and click on the link inside? 

Would you respond to an email that listed the sender as “loanManager;;;” and a subject line that said:  “personal l0ans up to $1000///” ?

I must have clicked on the wrong link and I am suddenly inundated with spam email, offering me everything from medications from Canada, new windows, and an online dating service that will lead me to the man of my dreams.  I resent the time it takes to send them to my spam folder, but I wonder and worry “who responds to these emails?”  How desperate does a person have to be to click on an email that offers a quick $1000 loan, with misspelled words and misplaced characters, isn’t that a RED FLAG to stay away?

The real question is this:   Where does someone who needs money find a reasonable alternative to the ‘Loan Sharks’ that are operating legally in Ohio – payday loans, title loans, and internet based small loans from foreign states or even foreign countries with interest rates as high as 900%!  Take a look at the page on this website that helps you decipher the legal interest rate limit on different types of small loans and learn to ask for and read the fine print to make sure the interest rate is reasonable.

Because PayDay (and Quick Cash) lending is so harmful, Consumers must learn to: 

• Develop a banking relationship with a local credit union or a neighborhood community bank;
• Become familiar with and use the personal financial management tools that are necessary to create and live within a budget, and
• When they need to borrow money, seek financing from the local neighborhood banker who cares about their success. 

We have some great Credit Unions in the Dayton area (including Wright Patt Credit Union  which is doing some great work to help educate and protect our neighbors from abusive lending).  But we need to teach these skills to our children and get them on the right path at a much earlier age. 

 In 2007, the Ohio legislature passed the Predatory Lending Law Homeowner’s Equity Protection Act. (the Department of Commerce has a synopsis of the Act HERE.  For readers interested in an even shorter version, The Coalition on Homelessness and Housing in Ohio has one HERE)  

The Homeowner’s Equity Protection Act contained a little-known provision that created a 12-person board that was supposed to design a financial literacy program to be used in the Counties with the five worst mortgage rates.  The Board was also supposed to review various state agencies to make sure that they have policies and practices that: 

[A]ddress financial literacy, access by state residents to financial information, education, and resources, prevention of foreclosures and bankruptcies, and prepurchase and postpurchase counseling and education for homebuyers; Sec. 1349.72. (A) (1)

In fact, a certain percentage of fees for licensed lenders was to be set aside for funding these programs….At this point in the blog, I was going to tell you to call the Department of Commerce and ask them what this Board was doing to ‘promote financial literacy’ throughout the State –  When it meets; What programs it adopted; Which schools had financial literacy on their syllabus; How they were using the money that was being collected.  But, you can’t.  Because, in June of 2011, the legislature repealed the two sections  that created this Board in the first place.  Perhaps the better question is: Who thought that it was a good idea to stop educating the citizens in the five Counties with the worst foreclosure rates about financial literacy?

Posted by: Nadine Ballard