Payday Lending is a Huge Money Maker for Big Banks

111-2New Orleans The Consumer Financial Protection Bureau (CFPB) released a recent report in the United States with the boring title “Online Payday Loan Payments,” but despite that, wake-up, this is important.

The report is ostensibly directed at online payday lenders, and there’s nothing wrong with that; they need a hard look. Many of them have created a business model out of trying to skirt state regulations designed to at least try to reduce predatory practices. The Attorney General in New York got a lot of publicity by going after a gang of them, including some that were adding insult to injury by operating from Indian reservations to claim yet another layer of impunity.

Anyway the top line of the report got a couple of seconds of attention over the fact that based on the CFPB findings the average payday lending victim in addition to paying the vig on the loan and a host of other penalties and fines that lard up the total price of the repayment, also pays an average of about $185 over 18-months in bank charges when the lender hits their account for payment and hits the account dry. They found that the average overdraft fee for these desperate consumers was $34 a hit. The report, examining 2012 data, determined that the overdrafts and NSF (non-sufficient funds) were routinely triggered by the payday lenders and the banks:

“Of the average of $185 in fees, $97 on average are charged on payment requests that are not preceded by a failed payment request, $50 on average are charged because lenders re-present a payment request after a prior request has failed, and $39 on average are charged because a lender submits multiple payment requests on the same day.”

The report also illustrates how this collusion of payday lenders and banks stubbornly victimizes the consumer. CFPB found that normal collections succeed 94% of the time, but of the 6% that fail, when the lenders keep hitting the account multiple days, 70% fail on the second hit, and subsequent hits or re-presentations, as they call them, bounce even higher and harder. Often in fact they found that they only succeed because the bank covers the hit, incurring yet more charges to the consumers. It’s kind of a surprise that they found about one-quarter of consumers with a payday loan had their accounts closed within a one-year period, because for banks this was a cash cow. They likely only pulled out because they couldn’t get any more blood from these stones.

If you wonder why banks have deserted the business of low-level consumer loans, the picture becomes clearer with this study: they make more with less risk by fleecing the customer on the overdrafts and NSFs, thanks to their buddies in the payday loan business and their computer programs. Although the CFPB work studied online payday lenders, most payday lenders require automatic account deductions for their payments as well, so it’s really the same mess, just with a physical address.

Studies in recent years by the FDIC found that banks make over $17 billion from overdrafts and NSF charges. The big three banks made more than $1 billion just between themselves. Besides making money from payday lending on the front end by loaning the money to the payday lenders to re-loan as predatory as they can get away with, banks are exploiting their victims with their partners help on the back end with these charges.

At the least we need to stop the pyramiding of fees and force the fees to represent real costs to the banks. Furthermore, when someone’s account runs dry, why allow them to keep going back to that well, unless it’s to lard on more fees. We also need to make all financial institutions come clean about how much they have their hands in these rip offs of cash-poor low and moderate income families.

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Perhaps Some Progress on Payday Lending Rules in USA

New Orleans   Payday lenders could not operate without the collaboration of the big money center banks.  They are financiers providing the dollars being lent in predatory fashion to desperate lower income families.  They are also the loan collectors by facilitating drafting from borrowers’ accounts to service the loans for the payday lenders, sometimes on multiple occasions as we all saw in the recent JPMorgan Chase scandal.  Finally, it appears with some prodding from Congress, the Office of the Controller of the Currency (OCC) and the Federal Deposit Insurance Commission (FDIC) are moving to clamp down on some of the big banks payday lending business, especially that of notorious bad actor, Wells Fargo, and U.S. Bank, both of whom have been bottom fishing to compete against the most predatory players.

             The new standard being proposed, similar to the recent consumer and low income advocate gains around home mortgages and other work done by the new Consumer Financial Protection Bureau (CFPB), would reportedly stress “affordability,” meaning that a loan could not be made where there was not a reasonable expectation of the borrower’s ability to repay.   As ACORN Canada studies on payday lending have thoroughly shown the first loan often leads to a series of similar loans over a 15 month period as the borrower tries to extract themselves from the loans with repeated additional loans, deepening their financial crisis.  Importantly, the government agencies are going to bar any additional loans for 30-days between loans and would not allow additional loans until the first loan is paid off. 

            Some of these so-called direct-deposit loans or “checking account advances” as U.S. Bank calls its product seem frighteningly like the tax preparer “advances” in anticipation of refunds, but of course payday loans are by definition marketed as loans against the coming payday, even if the borrower is out of work without a payday in sight.  Hiding behind the notion that these loans are an “advance” and for the “convenience of the customer,” banks are also not disclosing the level of the interest rates involved, which are exorbitant, as you would imagine.  “Convenience of the customer” must be a euphemism for describing the desperation faced by the borrower.   Wells Fargo spokespeople, according to the New York Times, also tried to hide behind the facade that they were just lending a hand to customers facing an “emergency situation.”  Well, yeah!   Too little money and too much month!  Come on, boys!

            All of this is pure and simple loan sharking and part and parcel, of the criminal enterprise that big time banking has become these days, so it is refreshing to think that some of the regulators might be waking up and starting to do something about it.  Hopefully they will move from the big fish to the little fish soon and go after the whole payday lending industry, which has been thriving in the great recession.

Audio Blog of Payday Lending

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Chase and Other Banks Need Policing & Regulation on Pay Day Lending Abuses

Little Rock       It takes a lot of newsprint and video clips to bring Jamie Dimon, the arrogant chief of JP Morgan Chase, one of USA’s largest banks, down but stories in the Times picked widely of Chase enabling predatory on-line payday lenders by allowing hundreds and thousands of overdraft and other fees to empty workers’ accounts when payday companies tried to collect payments scores of times over a matter of days.  He claimed he was going to fix the problem.  It is clear his fix is the same as the “fix is in,” and is a wave at the problem without any real reform.

Dimon and Chase claim they will only stop assessing NSF (non-sufficient fund) charges when an account is empty rather than continuing to kill the dead horse.  To respond to the problem with customers having paid off the loan but being unable to stop the payday predators from continuing to access automatic withdrawals, Chase claims they will “better train” their workers.  Are you kidding me?!?  That’s another way of saying, good luck, Charlie!  Chase claims that they will make it easier for customers to leave Chase and close their accounts to stop them from being raided with Chase’s help by letting people close if Chase itself deems the charges “inappropriate.”  They say they will alert the Automatic Clearing House (ACH) which manages the transfers about frequent abusers.  This is a bank tool, not a regulator!  This is no reform.  This is in fact is the same as saying you will do nothing, but simply using more words to say nothing.

Even more unbelievably though Chase is greeted with applause for doing nothing because Bank of America, Wells Fargo, and others said nothing, meaning they intend to do nothing or at least are waiting to see if they can get away with it.

Somewhere in all of this the fact that Chase and the rest are enabling a criminal conspiracy seems to be lost.  By allowing deductions they are “aiding and abetting” a crime since many of these on-line companies are skirting state laws capping interest and regulation payday lending.

Dimon and Chase are simply putting a fig leaf in front of the fact that they should be vetting the transfer process and instead are joining in the fleecing of their customers through illegal activity.

Jessica Silver-Greenburg reports that:

The changes come as state and federal officials are zeroing in on how the banks enable online payday lenders to bypass state laws that ban the loans. By allowing the payday lenders to easily access customers’ accounts, the authorities say the banks frustrate government efforts to protect borrowers from the loans, which some authorities have decried as predatory.

Both the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are scrutinizing how the banks enable the lenders to dodge restrictions, according to several people with direct knowledge of the matter. In New York, where JPMorgan has its headquarters, Benjamin M. Lawsky, the state’s top banking regulator, is investigating the bank’s role in enabling lenders to break state law, which caps interest rates on loans at 25 percent.

Let’s hope the government acts quickly and aggressively, because Dimon, Chase, and the rest of the gang are clearly just shaving off a couple of pennies here while they help clean out working families bank accounts.  There ought to be a law, and in fact thanks to some states, there are laws.  Now we have to see if these folks are going to enforce the law, because that’s all that can stop this.

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Remittances Increase from USA, Progress on Disclosures, and Pushback from MTOs

New Orleans  I badly want to say that there is finally progress in the United States on remittances, which are financial transfers from immigrant families, migrant workers, and others to their families and communities back in their home countries.  The Wall Street Journal reported that the volume of money being remitted has in fact gone up based on the numbers available for 2010.  Our colleague, Manuel Orozco, the foremost US expert on remittances, even predicts an increase of 7% to 8% to Latin America and the Caribbean this year, which is also good news for developing countries.  The toothless World Bank says that the 215 million migrants it estimates around the world are moving $372 billion to developing countries in 2011 and they expect it to hit $399 in 2012 and $467 billion in 2013.  These are huge numbers, especially when one country after another continues to look the other way as migrants and immigrants are gouged by the costs of sending the money through the various money transfer organizations (MTOs).

The much heralded Consumer Financial Protection Bureau (CFPB) that was the brainchild of Elizabeth Warren, now running for the U.S. Senate in Massachusetts took up the matter this year and has promulgated regulations.  Unfortunately, they gummed the problem as well, possibly because of the limits on their authority.  Rather than addressing the predatory nature of the pricing, the final rule which takes effect in February 2013 simply puts forward the standard liberal palliative of better disclosure.  I’ve often shared the limited value of the disclosures in the tax preparation industry for predatory refund anticipation loans (RALs), where the companies (H&R Block, Liberty, Jackson-Hewitt) were all too willing to flaunt their 250% on computer screens and big posters, knowing that the marks (clients?) were so desperate for their money they had no choice but to suck down the charges.  This is the same song now with remittances, simply another verse.

To quote their own website summary, the CFPB rule says the following:

The rules require companies to give a disclosure to a consumer before the consumer pays for a remittance transfer. The disclosure must list:

  • The exchange rate,
  • Fees, and taxes,
  • The amount of money to be delivered abroad.

Companies must also provide a receipt or proof of payment that repeats the information in the first disclosure. The receipt must also tell consumers the date when the money will arrive.

Companies must provide the disclosures in English. Sometimes companies must also provide the disclosures in other languages.

I’ll read the whole 113 pages of the rule in coming days in hopes of finding something more helpful, but I’m afraid that’s the deal.

Outrageously, Miriam Jordan of the Journal reports this new rule “could raise costs for consumers…some experts said.”  She then quotes someone from Wells Fargo, which is an embarrassment of a bank on almost every count,

Daniel Ayala, head of global remittance services at Wells Fargo, praised the rule for creating a level playing field.  But he cautioned that, ‘there are details that could…ultimately result in limiting access, higher costs and confusion.’

Are you kidding me?!?  Finally having a wee bit of transparency (in English which doesn’t necessarily help!) and a receipt is going to raise costs.   Wells Fargo and their banking and MTO buddies simply have no shame.  I hope these hypocrites made a big fat contribution to Clinton’s Global Initiative, because they certainly don’t mind exploiting the living bejesus out of these immigrant and migrant families.

In Canada the bill to cap costs at 5% (remember that is the World Bank and G-8 goal!) is making progress.  More endorsements have come forward from the Canadian Union of Postal Workers (CUPW) and the University of Toronto Student Union.  There are also encouraging discussions with the Liberals, who may actually join with the NDP in a joint bill.  I’m holding my breath.  Somewhere developing countries and the workers trying to help their families have to get a real break on costs, not just a piece of paper with some numbers on it.

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Mortgage Disclosures and Modification Appeals are not Enough Reform

San Francisco    There is no question that the new federal level Consumer Financial Protection Bureau (CFPB) is a good thing and that its initiative to reshape and clarify the disclosure forms for homebuyers is important and necessary work.  Writing such forms in plain and simple English is a needed step and requiring full transparency of costs and fluctuations in interest rates over the term of the loans are all steps forward.  All good!

At the same time, no one anywhere should even remotely be deceived that this is a reform of some kind in the mortgage lending industry or that it will change by more than a minimal degree the possibility of homebuyers being skinned alive and stripped bare as they were in the subprime debacle we continue to wallow in throughout the USA.  As long as brokers and mortgage agents are not regulated, properly licensed, and more than modestly supervised by their employers, including the big banks that own so many of them, and are allowed to have financial incentives that drive the sale of the property, the opportunity for flimflam and total fraud at the point of home closings will be exactly the same.  Potential buyers are so motivated to make the deal and buy their home that they will listen to what they are told, not what they might read, and it is the voice in their ear that turns the lies in front of their eyes every time.

Furthermore, the experience of predatory lending in these and other situations always depends on having people in a situation where they can be exploited and essentially have limited choices.  In Citizen Wealth and elsewhere I have told the story of negotiating and implementing agreements with tax preparers like H&R Block, Jackson-Hewitt, and Liberty, all of whom agreed in giant posters and on their computer screens to clearly divulge the 150 to 250% effective interest rates of their refund loan products.  Why not?  If someone was desperate for the money, they already knew they were going to pay a premium that was immense because they had no choice.  Many potential homeowners in these situations are in exactly the same situation.

An article in the back pages of the San Francisco Chronicle by Hugh Son, a Bloomberg writer, was instructive on this score today.  He was reporting on the “surprise” expressed by  Bank of America that they were getting a weak response from their offer to 60,000 mortgage holders that they were willing to reduce principal on mortgage loan modifications by up to $150,000 as part of the attorneys general settlements.  BofA thought maybe it was “borrower fatigue.”  Consumer advocates believed it was likely also the fact that BofA no longer had any credibility with their mortgage holders since they were the same servicers that had gotten them in the mess and maintained it:  why believe someone who had robbed you earlier?   Many may have also abandoned the property or maybe be underwater more than $150K which would make this offer of little value, pennies late and dollars short.  Previously we have also discussed that in many cases this settlement also gave credit for reductions in amounts and interest that were already achieved or waived fines and larded up penalties that the banks themselves had imposed for late or nonpayment.

Disclosures and big ticket settlements are still not reforms and continue to be ineffective as real solutions for the mortgage crisis for millions of families.  After all of these years, why wouldn’t people give up and believe that banks are criminal enterprises and their governments have abandoned them?

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