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

Facebooktwitterredditpinterestlinkedinmail

H&R Block, HSBC, & the end of RALs

57334671TB002_Last_Minute_TNew Orleans Refund Anticipation Loans or RALs are a product that have preyed on lower income worker families since their inception and promotion by the big tax preparers, H&R Block, Jackson-Hewitt, and Liberty, as well as smaller fry who could get access to credit.  Negotiating with these companies could get depressing when I worked with the teams of ACORN members who the ACORN Financial Justice Center when better disclosure meant looking at a rate package that would be between 220 and 250% annualized.  There was never anything good about the products no matter what they were called, but their heartbeat was the desperate need of many families to have the money the few days quicker than it could be obtained from the IRS on an electronic or mail filing.

In a significant concession HSBC, the main lender to the large preparers, announced that it was departing the business in what they described to me, and I reported in Citizen Wealth, as “reputational” concerns.  Despite the fact that they were making almost $200M per year from this business, there was no way to disguise its predatory nature.  JP Morgan-Chase was another big player in a session where they were conceding that they would lower rates, asked me sarcastically if we thought it would be “better if they got out of the business,” to which we answered “yes!”  Santa Barbara Trust was the last major lender still hanging in the business.  HSBC has assured us that they were on a step down, transitional contract, which would pull them completely out of the business with H&R Block by the end of 2009 while they dropped other companies immediately.

Given that background, I was both disappointed and delighted to read the news from H&R Block that they were scrambling to replace HSBC as their lender and credit source for RALs for the 2011 tax season.  This should not have been a surprise to them, but it was a surprise to me to see that HSBC had continued to stand behind the RALs in 2011, long after they had assured me that they would be out of the business completely.  Clearly in the last 2 ½ years since I left ACORN the organization had taken its eye off of the target and the consequences had not been good for lower income working families who are dependent on professional preparers.  That is disappointing.

Delightful was seeing that the IRS finally did the right thing after having been an enabler to this thievery for so many years and eliminated a code this last summer that allowed tax preparers to know whether or not the likelihood was good that the filer would receive their entire refund sufficiently to cover the charges and fees being larded on by the preparers.  The IRS was effectively doing a low grade “credit check” for the preparers.  Disgusting!  Once they did that the Office of the Controller of the Currency (OCC), one of the many federal bank regulators, issued a determination barring HSBC and the like from such lending by classifying it now as too risky, despite a last minute contract extension that Block (after filing suit against HSBC for reneging on the contract) had negotiated with HSBC for the 2011 season where Block would cover all HSBC losses.  Finally the federales did the right thing!

Though this may be the death knell for RALs, which are a loan with interest, against the sums, some of the other predatory schemes will still survive.  Block announced that it would continue to fund refund anticipation checks, which are more like advances, through its own bank, the H&R Block Bank.

These predatory operations have been crack cocaine for the big-time preparers for years, so it will take some time and effort to cut the heads off of theses snakes, but at least more of the tails are now going.

Thanks to Eileen A.J. Connelly and David Pitt, AP personal finance writers for a great story on these developments!

Facebooktwitterredditpinterestlinkedinmail