Payday loan regulation passed by Texas Senate. / Image: swanksalot/Flickr/CC BY-SA

Two measures designed to regulate the payday lending industry were passed by the Texas Senate for the first time on Monday. Reactions to the legislation have been mixed; supporters call it is a good start, and critics say it does not go far enough.

Bills are both passed by large margins

Both bills, 2592 and 2594, were the result of negotiations between the payday loan industry and consumer groups.  The bills passed the Senate vote by a large margins.  Bill 2592 passed 27-3 and 2594 passed 28-4.

New bills require fee disclosure

The legislation, proposed by Sen. John Carona, R-Dallas, requires short-term lenders to obtain a state license and to disclose information about their fees to their customers.

Fees remain unregulated

Those fees, however, will remain unregulated. “What we present to you today,” said Sen. Corona, “is the limit of what we could do. I leave this session disappointed that we’re not able to do more.”

Critics want the ‘cycle of debt’ to be addressed

Some say the bills are merely token efforts, claiming that the proposed legislation does not address what has been called “the cycle of debt.”  This refers to borrowers who extend their short-term loans multiple times, leading to heavier fees.

Previous bill

A previous bill written by Sen. Wendy Davis, D-Fort Worth, and by Sen. Royce West, D-Dallas, called for much tougher regulation.  That bill required a cap on fees, but never made it to the floor for debate.

Federal law requires fee caps at 36 percent a year for military families.  That limit, however, has not been enforced in Texas.

Davis calls legislation ‘disappointing’

Davis claims the legislation was diluted by lobbyist for the payday loan industry.  “It’s very disappointing,” she said. “It makes you lose your faith in democracy.”

House still needs to approve the bills

The House must approve Senate changes before the measures can go to the governor.

Sources

American-Statesman

Financial Blog

Seek4News

Jumbo loans, or large mortgages for lavish homes, are becoming harder to get as mortgage lending requirements are changing. Image from Wikimedia Commons.

The mortgage industry is going through a volatile period, and the product known as jumbo loans is about to become harder to come by. Jumbo loans are mortgages for large amounts, usually $700,000 or more, and fewer banks may wind up willing to lend them. Smaller mortgages may also get harder to approve.

Mortgage underwriting requirements changing dramatically

Freddie and Fannie play a huge role in the mortgage industry. When a bank wants to lend a mortgage, Fannie Mae and Freddie Mac often agree to purchase the loan from the bank and sell it to investors as a security. This increases the amount of available loan capital so banks can lend more. The mortgage houses are becoming far more discriminating, and the mortgage products called “jumbo loans” are on the way out. The amount that qualifies as a jumbo loan has been revised, according to Reuters, to $625,000 from $729,750. This means in October, Fannie and Freddie will no longer back loans of $625,000 or more. Home buyers who want jumbo loans are scrambling to get the mortgages approved before the loans can’t be underwritten anymore.

Mortgages for low income people to suffer as well

Banks are more willing to lend to people when Fannie and Freddie will purchase the loans. New lending requirements being proposed by the Federal Reserve may make it harder for low income buyers to get a mortgages. As a result of the Dodd Frank Act, the Federal Reserve has proposed that an “ability to repay” metric be established as a requirement to get a loan, according to MSNBC. Low income borrowers would be affected, as an already skittish mortgage market is not conducive to lending bad credit loans for housing. Lending mortgages to people who couldn’t pay them back, a criticism often leveled at credit card companies and payday loans lenders, has often been pointed to as one of the chief causes of the housing market crash. The Fed is only taking comments, according to the Wall Street Journal, and is handing over authority to the Consumer Financial Protection Bureau over mortgage lending practices when the agency begins operations in July.

Credit to tighten for housing

Many indicators point toward credit within the housing industry tightening significantly. Underwriting and purchasing requirements at Fannie and Freddie are already becoming far more strict. For a Freddie or Fannie affiliated lender to lend money for a condominium, 70 percent of the condo units in the building must already be sold, according to CNN. That requirement was 51 percent in 2009. The Federal Reserve and National Association of Realtors estimate that 25 percent of all mortgage application are currently denied, and fewer banks are willing to lend without federal backing from Fannie and Freddie.

Sources

Reuters

MSNBC

Wall Street Journal

CNN

The Federal Trade Commission has frozen assets of six companies accused of payday loan fraud. Image: wsavespublicart / Flickr / CC BY

This morning, the Federal Trade Commission filed a fraud lawsuit against a group of several individuals and companies. The FTC says these companies and individuals defrauded customers seeking payday loans. These companies allegedly charged customers for products they did not want or choose.

Alleged violations of FTC Act

A group of companies headed by Michael Bruce Moneymaker, Mike Smith and Michael Bruce Millerd was named in the complaint by the Federal Trade Commission. Among others, these three ran Fortress Secured, Belfort Capital Ventures Inc., Dynamic Online Solutions LLC, HSC Labs Inc., Red Dust Studios Inc. and Seaside Ventures Trust. These companies are accused of obtaining customers’ bank account information through payday loan applications and then misusing it. Most often, the account information was used to charge customers “subscriptions” for services they did not knowingly agree to.

Alleged misuse of Terms of Service agreements

Customers coming to the websites run by the companies and individuals named in the complaint often were required to accept Terms of Service agreements to complete applications. Buried in the Terms of Service were agreements to monthly subscriptions for services like voicemail and airline tickets. These “continuity services” usually had a $40 to $50 subscription fee and another $19.95 per month. Many customers had no idea they were enrolled in the services and only discovered it if they checked their monthly statements. When the customer contacted the companies, they were rarely, if ever, given a refund. The customers were often also told that they were not entitled to refunds because they had agreed to the service.

Specifics of the FTC complaint

Michael Bruce Moneymaker and his associates were charged with five specific crimes:

• Obtaining consumers’ bank account information and debiting their accounts without their informed consent
• Falsely representing that consumers’ authorizations were part of their payday loan applications
• Failing to conspicuously disclose that consumers would be charged for third-party trial offers automatically
• Falsely telling consumers that they were not entitled to refunds because they agreed to enroll in the defendants’ programs and pay for them and had agreed that they could get a refund only if they asked during the initial trial period
• Falsely promising refunds to consumers and not providing them

Protecting yourself from payday loan fraud

Protecting yourself from payday loan and lender fraud takes just a few extra minutes. Be sure to read the full text of any agreement you digitally or physically sign. If you are applying for payday loans or any other financing, be sure that the company you are applying for provides a physical address, phone number and responsive customer service.

Source

FTC.gov

Younger people, like recent college graduates, are optimistic about their future, even though they expect to not be as well off as their parents. Photo Credit: apermanentwreck/Flickr.com/CC-BY-SA

People of college student age are expecting to be less wealthy than their parents but more satisfied with life, according to a recent survey. An Associated Press survey of people ages 18 to 24 revealed that younger people, especially those saddled with higher amounts of student debt, expect a lower quality of life than their parents.

Younger generation expects less money, more happiness

The college age set is less optimistic about how much money the future may bring but is confident that the long term course of their lives won’t be doom and gloom, according to MSNBC. A poll conducted by the Associated Press and Viacom of 18- to 24-year-old people found that 40 percent of survey subjects thought that traditional goals like raising a family and purchasing a home would be more difficult than it was for their parents. About 25 percent believed that life would be easier for them than their parents. About 90 percent of the survey subjects believed they would eventually find a career they find fulfilling.

Student debt increases the burden

The people in the AP survey indicated that they believed making a living would be harder because of increased costs. Among costs steadily increasing for people in that age group is student debt. The average college graduate has about $24,000 in loan debt, according to the New York Times, which at an interest rate of 6.8 percent demands a payment of $276 per month, and student loans cannot be discharged in bankruptcy. The Department of Education reports that 65.6 percent of all undergraduates from 2007 to 2008 received some sort of financial aid, and 38.5 percent of all undergraduates had student loans of some sort. The Department of Education found that 30 percent of all undergraduates took out subsidized Stafford loans and 22 percent borrowed non-subsidized Stafford loans.

Investment that does pay off

The average wage earner with a college degree grosses about $53,000 per year, according to the Bureau of Labor Statistics, but few people earn that much upon graduation. A college degree is not a guarantee of immediately falling into a healthy income, but it increases the likelihood that a person will earn a solid middle class income during their lifetime. People with college degrees also tend to have lower rates of unemployment; Americans with bachelor’s degrees had a 4 percent lower rate of unemployment than those with only a high school diploma in 2009. However, the cost of the security that a college diploma offers is going up.

Sources

MSNBC

Department of Education

New York Times

Bureau of Labor Statistics

The Lansing Planning and Zoning Board can't hide their true intentions for payday loans. (Photo Credit: CC BY/Albert Bridge/Geograph)

If a legal business offers a product like payday loans – a product for which there is a proven demand – the efforts of local governments to restrict payday lenders through cutthroat zoning policies are at best questionable, says the Payday Pundit. NWI.com reports that the Lansing, Mich., Planning and Zoning Board is looking for ways to revise ordinances to phase bad credit loans out of town. In light of Michigan’s HB 4214 legislation, which enables Gov. Rick Snyder to declare “financial martial law” and install an emergency financial manager (EFM) when a city’s economy fails, kicking legitimate business out of any town becomes problematic.

Revising ‘special use’ provisions

Lansing’s Planning and Zoning Board of Appeals has been poring over the city’s “special use” zoning provisions, ostensibly as a check-up to see if any changes need to be made. It cannot be coincidental, however, that the board’s suggestions for changes primarily targeted payday lenders. Parking near churches in residential neighborhoods and limiting the number of in-home day care centers may have its civic import, but the business of bad credit loans boosts both credit-constrained consumers’ ability to avoid insolvency through credit default and a city’s economy as a whole.

While the proposed zoning change would only prevent new payday loans outlets from locating in Lansing, critics see such a move as the typical first step against an enterprise lawmakers want to covertly torpedo. Passing it off as encouraging “more variety in the types of companies” that call Lansing home, which is how Trustee Mikal Stole explained the proposal to NWI, is a smokescreen.

Where there’s smoke, there’s fire

Michigan House Bill 4214 — which state AFL-CIO president Mark Gaffney called “an assault on democracy” and Detroit Rep. John Conyers warned would give a state government-appointed “financial czar” (EFM) the power to “force a municipality” like Lansing into bankruptcy — has already scorched state soil. The political powers of Benton Harbor, Mich., officials have been superseded by a newly appointed EFM who will take control of the municipality. The economy of the small town may be bad enough to warrant dissolution, a power HB 4214 grants to a governor-appointed EFM.

According to the Rachel Maddow Blog, Benton Harbor’s per capita income is $8,965, the lowest in Michigan. Just across the St. Joseph River from Benton Harbor stands local “Twin City” St. Joseph, which boasts a higher PCI, $24,949. This is significant because Benton Harbor is the home of the Whirlpool company, which is celebrating its 100th anniversary this year. But the company is celebrating it on the “other side of the tracks,” in St. Joseph.

The people of Benton Harbor would no doubt like to see its revenue-producing businesses stay home. When it comes to payday loans, Lansing should be concerned about keeping its moneymakers around because a financial czar could be waiting in the wings.

Sources

The Maddow Blog

NWI.com

Payday Pundit

The 2011 NFL lockout may send less financially savvy players into high interest loans, critics claim. (Photo Credit: CC BY-ND/Joshua Hess/JWR Hashkafa)

The average consumer-level same day loan comes with a 15 to 25 percent fee per $100 loaned. Considering the relatively small dollar amount of these instant payday loans, the fee generally doesn’t break the bank. However, the 2011 NFL lockout has given rise to high-dollar variation of such loans, which the media has dubbed “lockout loans,” reports Yahoo! Sports. Players without paychecks because of the labor dispute who find themselves in financial distress are being solicited by lending agents with offers.

Lockout loans: When 36 percent APR is dangerous

While a 36 percent APR attached to consumer same day loan of $300 or $400 produces too little revenue for a lender to operate, NFL lockout loans for more than $60,000 at as much as 36 percent APR generate a lot of interest very quickly. Yet players from at least 16 NFL teams have already applied for such large-scale instant payday loans, writes Yahoo! Sports.

The NFL Players Association lockout fund has helped some players, but clearly the response to high-risk lockout loans indicates that some players haven’t curbed their extravagant lifestyles in the absence of their paychecks. The NFLPA advised players to save at least three game checks from the previous season in anticipation of the 2011 lockout, but insiders report that the advice may not have been heeded. In addition, the NFLPA has urged players to refinance their homes, fly coach and pursue moneymaking opportunities like autograph signings and speaking engagements in this extended off-season, writes MSNBC.

Why do NFL players have money problems?

Sports psychologists suggest that star athletes are surrounded by enablers from a relatively young age. By the time players reach the professional ranks, it is not uncommon for them to lack real world financial knowledge, as they’ve never had to take responsibility for such things. Throwing millions of dollars at someone who may have grown up poor can also open the door to myriad temptations. This is perhaps why as many as 80 percent of retired NFL players have declared bankruptcy, according to a Sports Illustrated estimate. MSNBC indicates that as many as 380 of the NFL’s 1,700 players live from paycheck to paycheck, even though the average NFL annual salary in 2010 was $1.87 million. The rookie average was $320,000, but after taxes and agents, money problems can occur if players aren’t careful.

A dissenting voice in support of lockout loans

Sherard Rogers, a financial adviser to a number of NFL athletes, told Yahoo! Sports that lockout loans are a legitimate product that meets player demand. While franchises will endure, players who live to spend can run into trouble.

“Every NFL team was valued at over $1 billion, so they can weather the storm of a lockout. But could players if there weren’t resources to cover this short-term labor dispute?” asked Rogers. “The key is to figure out how to solve the short-term liquidity issue and put the pieces in place to ensure they don’t have this liquidity issue again.”

Sources

MSNBC

Philly Sports Column

The Real Athlete Blog

Yahoo! Sports

Both sides are feeling the ‘deal heat’

The Anti-Poverty Coalition of Greater Dallas wants payday lending in Texas to end. (Photo Credit: CC BY-ND/Nik Hewitt/Best of Both Worlds)

Jobs fight poverty. Gainful employment grants motivated, enterprising consumers with the means to provide. Yet groups like the Anti-Poverty Coalition of Greater Dallas seem to have missed the memo, suggests the Payday Pundit. The Dallas Observer reports that the Dallas coalition is working hard to shut down personal loan and installment loan companies in Texas, as if eliminating thousands of jobs resembles a blow against poverty.

Blazing a trail out of poverty through scorched earth

Larry James, the CEO of Dallas-based non-profit CitySquare, told local media via press release that the coalition has a burning desire to find pathways out of poverty:

“The Anti-Poverty Coalition of Greater Dallas is a new coalition that seeks to move 250,000 people out of poverty permanently by 2020 by coordinating efforts to keep people from falling into poverty and increasing pathways out of poverty,” writes James.

‘A treadmill of debt’

The attack against the personal loans and installment loans industry amounts to keeping people from falling into poverty – “a treadmill of debt” – said James. Legislation such as Texas HB 410 and SB 253that bars payday lenders from being classified as credit service organizations would challenge existing zoning ordinances. By instituting a “strong zoning ordinance to decrease the clustering of payday and auto title lending stores,” the Anti-Poverty Coalition of Greater Dallas believes the shackles of poverty would lift from the wrists and ankles of the poor citizenry. Allegedly, there would be no more tears for those who were financially razed, not by bad personal spending habits and the exploitation of Wall Street, but by the so-called evils of payday lending. In truth, eliminating payday lenders limits consumer choice and costs Texas jobs, both dire consequences in light of the recession-ravaged economy.

An indirect attack, at best

Instituting zoning ordinances via HB 410 and SB 253 that would require personal loan and installment loan outlets to be at least 1,000 feet apart would only be the beginning, industry experts believe. Direct attacks against payday lenders such as demanding an untenable 36 percent APR cap have proven unpopular when it comes to battling poverty, as it would shut payday lenders down, which means people would lose their jobs.

Attacks through zoning fail to disguise the true intent of such “anti-poverty” coalitions. If groups like the Anti-Poverty Coalition of Greater Dallas took the time to understand the extant independent research that shows the connection between the absence of access to short term loans in a community and higher levels of poverty, perhaps charitable groups could find a more worthwhile target for their efforts.

Sources

Dallas Observer

Payday Pundit

Texas HB 410

Texas SB 253

Texas Secretary of State

Jobs fight poverty

Student loan debt is expected to rise even faster as tuition increases and federal financial aid options dwindle. Image: Flickr/grifray's photostream CC-BY-SA

More students are going to college, and most of them are going into debt. Student loan debt outpaced credit card debt in 2010 and is expected to pass $1 trillion in 2011. Student loans, long considered a “good debt,” may morph into a bad debt for graduates faced with decades of payments.

Student loan debt rises with tuition

In 1993, less than half of students earning a bachelor’s degree graduated with student loan debt. By 2008, the number of students graduating in debt had risen to two-thirds. In 2009, college graduates left school with an average of $24,000 in student loan debt. Total student loan debt is expected to reach $1 trillion this year and grow at at even faster rate. Republicans in Congress want to cut Pell grants, a form of federal financial aid for lower-income students. As cash-strapped states cut funding to universities and colleges, tuition increases will add to a mountain of debt that is expected to have a profound impact on the current generation of college students. As student loan debt grows, so does the rate of student loan default. Credit damage, as well as burdensome student loan payments for those who don’t default, will limit the range of options when it comes to buying a home or having children. Those who have children may have to choose between paying off their student loan debt or saving for their children’s college education.

Good debt versus bad debt

When it comes to debt, student loans have always been considered “good debt,” as opposed to “bad debt” such as credit cards, auto loans or payday loans. In the aftermath of the recession, any kind of debt has become undesirable. But even as the average cost for a four-year private education has reached more than $37,000 a year, according to the College Board, student loans can be good debt if the degree results in a salary that allows the debt to be paid in a reasonable amount of time. A simple rule of thumb among financial advisers is not to borrow more than you expect to make in the first year on the job after graduation. That rule of thumb, however, highlights the risk of taking on student loan debt. Finding a job that pays off the average cost of college with a degree in sociology or history is unlikely. The risk may be lower for fields such as engineering or medicine, but the costs, and the debt, will likely be higher.

Bottom line: debt is risky

When it comes to good debt versus bad debt, the bottom line these days is simple: all debt is bad if you can’t pay it off. Default rates are rising — to almost 50 percent — among students who attended for-profit colleges. Student loans usually can’t be discharged in bankruptcy. For federally guaranteed student loans, the government can garnish wages, withhold tax refunds or dock Social Security payments. The Obama administration did make it easier for student loan debtors stuck in low-paying jobs by forgiving the balance on debt for those who have dutifully paid 15 percent of their income toward their student loans for 25 years — or 10 years if they work in public service.

Sources

New York Times

Creditcards.com

care 2

The people of Kentucky still have the freedom to choose payday loans if the product suits them. (Photo Credit: CC BY-ND/EPSCOR)

The recent failure of House Bill 182 in the Kentucky House Banking and Insurance Committee – a bill that would have capped payday loan rates at 36 percent APR, effectively killing the industry in the state – is a sign that the will of the people still means something, suggests Kentucky Community Financial Services Association of America spokesman Kevin Borland. In an op-ed piece for the Lexington Herald-Leader, Borland reminds us that consumers prefer choice, and freedom of choice is a factor in the current battle over the short term loans industry.

Victory against House Bill 182 – for now

While free market capitalism carried the day in a close 13-10 vote against Kentucky House Bill 182, opponents of payday loans insist that they will regroup and re-introduce the same bill in 2012. Such stubbornness illustrates how much Kentucky activists misunderstand payday loans, writes Borland. State law prohibits payday lenders from charging interest. In Kentucky, the product is categorized as a single-payment, fee-based product.

Borland suggests that the opposition’s use of APR as a yardstick is “an attempt to trick legislators and the public” into thinking that short term loan pricing is exorbitant. In reality, a flat fee of $15 to $25 per $100 loaned on a typical two-week payday loan is a 15 to 25 percent fee, depending upon the lender.

Having the CLOUT to be hypocritical

The Citizens of Louisville Organized and United Together (CLOUT) and the Kentucky Coalition for Responsible Lending (KCRL) supported House Bill 182, as did the AARP. Interestingly, CLOUT and the KCRL are heavily funded by banks and credit unions that compete in the short term loans market. While there’s nothing wrong with healthy competition in a free market economy, it’s another matter entirely when CLOUT and KCRL attack payday lenders while accepting money from their competitors. At the very least, a disclaimer about a lack of impartiality should fly front and center, says Borland.

AARP competes directly with payday loans through its own credit card through Chase Financial. These allow AARP members to obtain cash advances, which Borland says bears a high interest rate.

Consumers make the best financial choice for their situations

While payday loans may not be ideal for every financial scenario, they can be the least expensive option available, particularly among credit constrained consumers. Borland believes that CLOUT, KCRL and AARP would do better to find alternatives if they think short term loans are harmful. The fact that those organizations do not do so may suggest that the attacks are all bark and no bite.

Sources

CLOUT funding

KCRL coalition membership

Lexington Herald-Leader

The CFSA encourages responsible lending and borrowing

If you're a student loan co-signer and the student fails to pay, this could be you. (Photo Credit: CC BY-ND/How to Get a Student Loan)

Have you ever agreed to be a co-signer on a friend’s student loan but regretted having done so after the fact? Let’s say you don’t talk to the person anymore, and fear risking a damaged credit rating if they default on the loan. Thankfully, Bankrate reports that all is not lost. There are ways to have your name removed from those student loan documents and improve your credit score in the process.

Student loan co-signer, know what you’re getting into

Becoming a co-signer on a student loan means you are guaranteeing the loan or the debt. If the student fails to repay the loan, it becomes your responsibility. Thus, it is wise to make sure that you’ll be able to make the payments, in the worst case scenario. If not, collectors will come to call and your credit rating will suffer severe damage, which in turn will make it much more difficult for you to obtain other forms of credit.

If you agree to co-sign on a student loan, the creditor is obligated by federal law to provide an explanation of your obligations as co-signer. You’ll want to make sure that you obtain copies of the loan contract and Truth in Lending Disclosure agreement for your records.

Release or refinance that student loan

Begin by pursuing a standard student loan co-signer release. Some private student loans allow a co-signer to cut ties if the student has made enough consecutive monthly payments on time (anywhere from 12 to 24). The student must also meet the lender’s credit standards and other requirements. Thus, the hope is that the estranged student has kept their credit history tidy.

If the lender will not allow you to obtain a co-signer release, then the student will have to refinance the loan. Refinancing enables the student to obtain an entirely new loan at a lower interest rate, and this loan pays off the original student loan. This can be done via the original lender, or through another lender if better rates and terms are available. Unfortunately, the student must have good enough credit to qualify for a refinance in the first place.

Why the student may not want you to leave

Obviously, abandoning a co-signer opens the student up to greater financial risk. If they are suddenly unable to repay their student loans and do not have a co-signer as a fallback, the lender can take them to collections. In the case of government loans, even tax return money isn’t safe.

Sources

Bankrate

eHow Family

Whalehook Loans

No co-signer? No credit history? No problem.

Big banks have not favored African-Americans and Hispanics, says the Center for Responsible Lending. (Photo Credit: CC BY-ND/Velocity)

African-Americans and Hispanics are beginning to lose ground when it comes to the use of traditional banking, according to the Center for Responsible Lending. Discriminatory practices like redlining (denying access to credit) have once again risen up as the U.S. struggles to emerge from the economic recession. Such financial discrimination, which includes mortgage denial and lack of access to short term loans from banks, highlights an ever-present form of racism, critics suggest.

Minorities losing homes at twice the rate of Caucasians

Center for Responsible Lending President Michael Calhoun told USA Today that U.S. minorities have “received the worst treatment, at a very high cost.” Estimates that 20 percent of African-American and Hispanic householders will lose their homes in the mortgage crisis – a rate more than double that of white householders – suggest that the gap between the minority and the majority is growing.

In his 2008 study of household debt entitled “Credit Access, the Costs of Credit and Credit Market Discrimination,” Christian Weller of the University of Massachusetts and Center for American Progress found that African-Americans were 41.7 percent more likely than Caucasians to be denied a traditional bank loan. The gap widened considerably when mortgages were in question.

The inequity of a ‘dual system of finance’

John Taylor, CEO of National Community Reinvestment Coalition, sees a double standard.

“It’s about a dual system of finance,” he says. “People of color do not have the same access that most American citizens enjoy.

The alternative when traditional banks deny low- or middle-income minorities credit is frequently no credit check payday loans from payday lenders. While such short term loans are highly convenient in a financial emergency, the fees are generally higher than traditional prime loans, said NAACP Senior Vice President for Advocacy and Policy Hilary Shelton. Also, payday loans are small and can’t take the place of mortgage loans.

The legacy of banking deregulation

Redlining and similar practices gained much attention in the 1990s, when entire minority neighborhoods were shut out of being able to obtain bank loans, mortgages and insurance. Not coincidentally, banking and utility deregulation that occurred at the same time has been tied by numerous academic studies to the practice of redlining. While regulators installed such mechanisms as the Community Reinvestment Act and Home Mortgage Disclosure Act to help combat redlining, further loosening of the oversight belt allowed the practice to continue in various forms (such as reverse redlining, where short term bank loans are offered in minority neighborhoods, but at prohibitive rates). This ultimately led to the Wall Street crisis, from which the U.S. is still recovering.

What regulators are doing now to stem the tide

• The FDIC is trying out a two-year short term loan program at 28 volunteer banks.
• The Department of Justice has created a fair lending unit to police redlining.
• The Consumer Financial Protection Bureau will open in July 2011.

Sources

“Credit Access, the Costs of Credit and Credit Market Discrimination”

“Power Dereg Will Promote Customer Redlining”

USA Today

Did banking deregulation stack the deck against minorities?

An extended payment plan can be the key to avoiding payday loan default. (Photo Credit: CC BY/MoneyBlogNewz/Flickr)

Despite planning and the best of intentions, sometimes people find themselves unable to repay their payday loans when they come due. That’s why payday lenders that are members of the Community Financial Services Association of America (CFSA) offer an Extended Payment Plan (EPP). These types of installment loans enable consumers to repay their loans over a period of additional weeks regardless of the reason for default and free of additional charges.

EPP provisions vary by state and lender

Depending upon the state in which payday loans originate and whether the lender is a CFSA member, the stipulations of an Extended Payment Plan will vary. In the event that the laws of that state already provide for an EPP for consumers who get behind on their payday loans, state laws take precedence. CFSA members offer the service as an aid to consumers in states where a specific law does not already exist. CFSA-member extended payment plans generally allow consumers to repay their installment loans in four equal payments over the next four paydays, says eHow Money. If a borrower misses one of the four EPP payments, additional fees may apply.

How to request an EPP from CFSA-member lenders

• Make sure the lender is a CFSA member. The CFSA’s blue oval logo should be on display in the payday lender’s office or on the website. Even if the lender is not a CFSA member, it may offer its own extended payment plan. Ask for details.
• Contact the lender before close of business on the due date. If you’re going to run into trouble repaying your payday loans, contact your lender before close of business on the day before your loan is due. Go to the lending office or contact the lender online. Ask for an extended payment plan. You’ll then need to sign an agreement form that will specify the additional due dates. Read the extended payment plan carefully before signing.

If the lender is a CFSA member and you haven’t used an EPP in the past 12 months, but the lender refuses to offer you an EPP to help you avoid default, you can file a complaint. Contact the CFSA during Eastern time business hours at 888-572-9329 (fax 703-684-1219) or cfsa@multistate.com. Alternatively, contact the CFSA by mail at 515 King St., Suite 300, Alexandria, Va., 22314.

Sources

CFSA Consumer Complaint Form

CFSA: What is an Extended Payment Plan?

eHow Money

Rhode Island legislators will soon debate the merits – or lack thereof – of 2011 H 5562, yet another payday loan rate cap bill. (Photo Credit: CC BY-ND/Patrick Haney/Flickr)

Just as He-Man had his infamous “By the power of Grayskull!” battle cry,  opponents of payday loans continue to cry for cartoon-like 36 percent APR interest – cartoonish because 36 percent has been proven numerous times to be well outside the bounds of practicable business reality. Yet legislators in Rhode Island, led by sponsor Rep. Frank Ferri, D-Warwick, are pursuing yet another bill that would attempt to cap payday loans at the same 36 percent APR. Lenders argue that this will drive them out of the state and drive consumers in need toward unscrupulous loan sharks.

2011 H 5562 would eliminate payday lending in Rhode Island

Volumes of published and unpublished independent research have shown that when companies that offer payday loans with no credit check are driven from a community, the overall financial condition of consumers degrades. Payday lenders don’t need that kind of blow to the bottom line, let alone the state of Rhode Island.

Advance America Vice President Jamie Fulmer told the Associated Press that a 36 percent cap would force Advance America to pull its 20 branches from Rhode Island. As it stands currently, the branches charge $10 for $100 payday loans. If Rep. Ferri’s 2011 H 5562 manages to become law, payday loan businesses could only charge $1.38 per $100 loaned.

“This is not a reform bill; it’s designed to eliminate our industry outright,” said Fulmer.

Anti-payday loans bill offers a single exemption

According to The Providence Journal, 2011 H 5562 offers but a single exemption to the 36 percent APR cap. Organizations that offer payday loans with no credit check can charge as much as 260 percent APR on short term loans. Because such loans come to maturity long before a year is up, the concept of an annual percentage rate on payday loans is not a useful yardstick, however.

Politician cries ‘financial rape,’ business trusts consumers

In a bout of cartoonish exposition, Rep. Lisa Baldelli-Hunt, D-Woonsocket, told local media that payday loans are “financial rape” and that a 36 percent APR is “predatory.” However, as Community Financial Services Association of America spokesman Steven Schlein told The Providence Journal,

“Consumers know what they’re doing. You walk in and you see our rates in big letters on a poster. We’re the most transparent financial service there is.”

Sources

Associated Press

The Providence Journal

Rhode Island General Assembly

The Government Accountability Office says banks can't effectively offer small-dollar loans. (Photo Credit: CC BY-ND/DRScoundrels)

There is a “tremendous demand” for unsecured personal loans in the U.S., says FDIC Chairwoman Sheila Bair. This means small-dollar loans are attractive to consumers and to mainstream financial institutions like banks and credit unions. Banks have tried to get in on the same day loans origination action – but not without complications, says a Government Accountability Office report.

Payday loan alternatives – and the banks that can’t deliver them

Due to more stringent terms and fee structures, payday loan alternatives offered by most banks and credit unions are a completely different animal than personal loans from a small lending outlet. The GAO suggest that the Dodd-Frank Act and other FDIC changes in recent months may increase traditional financial institutions’ willingness to offer same day loans, but the results may not be what banks expect:

“Recent statutory and regulatory changes and FDIC initiatives may encourage more institutions to offer small-dollar loan alternatives to payday loans or expand their availability, but many consumers may still chose to use payday loans for their wide availability and relative lack of eligibility,” says the GAO report.

A two-year FDIC pilot program illustrated that without the involvement of charitable organizations or government subsidies, banks and credit unions have been unable to popularize payday loan alternatives. Extensive underwriting requirements also tended to exclude the customer base that most wanted access to personal loans.

Same day loans will not exclude you from a government job

The notion that taking out same day loans is harmful to one’s financial reputation is disproved in the Government Accountability Office report. Federal agencies like the Department of Homeland Security, Transportation Security Administration and even the Federal Bureau of Investigations put applicants through an intense employment screening process that includes a thorough financial history. Credit reports are run and other financial evaluation tools are used.

According to the GAO, screening agencies stressed that whether or not applicants to high security clearance positions had used short term loans was not a determining factor in the hiring process. The presence of risky patterns of financial behavior is important, however, which underscores the important of financial responsibility – for government employees and consumers in general. If banks and credit unions could ever free themselves from the policy maze and judge same day loan applicants over a more broad range of financial responsibility, perhaps the institutions could sell personal loans directly to consumers.

Sources

Community Financial Services Association of America

Government Accountability Office

Don’t live beyond your means, even with payday loans

Colorado HB 11-1290 may hit the floor for debate this week. (Photo Credit: Public Domain/Colorado General Assembly/Wikipedia)

According to Rep. Larry Liston, R-Colorado Springs, the recently passed Colorado payday lending bill – HB 10-1351, in which the standard two-month payment period for payday loans was replaced by a six-month installment loans term – was toxic to the state’s small consumer loans industry, costing as many as 450 jobs. In order to help bring a measure of equilibrium back to the state economy, Colorado legislators have drawn up HB 11-1290, a bill that would require that customers pay the origination fee on installment loans up front, rather than a pro-rated portion of the fee should the customer pay off the loan early.

Colorado House Bill 11-1290 could hit committee this week

Introduced Friday on the floor of the legislature, Colorado House Bill 11-1290 could be debated as early as this week, reports the Colorado Statesman. The installment loans origination fee of $20 per $100 loaned for the first $300 and $15 per $100 loaned for the next $200 up to a maximum of $500 loaned nets lenders up to $75. In addition, a monthly maintenance of $7.50 per month per $100 and a finance charge of 45 percent can be charged according to Colorado law.

As two-week payday loans can no longer be offered in Colorado, lenders argue that being able to charge a full origination fee as HB 11-1290 stipulates is necessary for survival.

HB 11-1290 sponsors predominantly voted against HB 10-1351

The legislation has 10 co-sponsors in the House, including Rep. Sue Schafer, D-Wheat Ridge, who voted “no” on HB 10-1351, as well as Rep. Ed Casso, D-Commerce City, who favored HB 10-1351. Senate sponsors include other anti-HB-1351 legislators such as Sen. Mary Hodge, D-Brighton, and Sen. Lois Tochtrop, D-Adams County.

Technical correction or incentive to re-borrow?

Supporters of Colorado House Bill 11-1290 maintain that the origination fee change is merely a technical correction to the provisions of last year’s HB 10-1351. Rich Jones of the Bell Policy Center disagrees:

“It’s an incentive for the lenders to get customers to pay off their loans early and then take out more loans,” Jones told the Statesman Friday.

Sources

Colorado House Bill 10-1351 fact sheet

Colorado House Bill 11-1290

Colorado Statesman

‘Steering Colorado’s economy back on course’

Western Sky Financial claims Maryland short term loans regulation does not apply to its business, due to tribal immunity. (Photo Credit: CC BY-ND/Stephen Bridenstine/Drawing on Indians)

There are a variety of state laws that apply to licensed payday lenders. When a legitimate company operates outside the bounds of state law – such as with Native American tribal lending – state laws traditionally have not applied. According to the Center for Public Integrity, such a legal divide has resulted in a legal clash between Maryland regulators and Western Sky Financial, a personal loans provider that claims affiliation with the Cheyenne River Sioux Tribe.

Western Sky claims sovereign immunity

Western Sky Financial owner, Martin Webb maintains that his company’s short term loans activity amongst Native American tribes protects it from state laws. This is an argument that Maryland is challenging in court as it attempts to tighten the reins on personal loans legislation in the state. Maryland claims Native American lenders use tribal immunity to skirt existing laws and offer short term loans to customers nationwide. Critics of the industry await a Consumer Financial Protection Bureau ruling on whether industry-wide reforms will also impact native payday lenders.

Western Sky violates Maryland law, claims commissioner

Maryland deputy commissioner for financial regulation Anne Norton sees the Western Sky Financial personal loans issue in black-and-white terms:

“I don’t think there’s a lot of gray area in terms of what is or is not permitted,” Norton said. “Under our reading of both how tribal immunity is interpreted and how it’s been applied by the Supreme Court, we feel that these are loans that violate Maryland law.”

Maryland law caps payday lending APRs at 33 percent on the unpaid balance. As Western Sky Financial does not hold a Maryland license – the company operates online out of South Dakota and claims sovereign immunity as a member of the Cheyenne River Sioux Tribe – it currently operates outside the bounds of Maryland short term loans regulation. APRs charged for short term personal loans vary by state, but are generally at least three times higher than the Maryland cap.

Indian Commerce Clause and legal precedence

Webb’s attorney argues that under the Indian Commerce Clause of the U.S. Constitution, tribes are the ones responsible for regulating consensual relationships undertaken between non-members and members of a tribe. As Webb claims membership in the Cheyenne River Sioux Tribe, he believes his business should not have to recognize non-tribal payday lending laws.

While Maryland does recognize the sovereign immunity of the Cheyenne River Sioux Tribe, Norton argues that Western Sky Financial is not an arm of the tribe, and hence should not be protected.

It remains to be seen on which side of the argument a court will rule. However, as numerous instances of legal precedence in which federal courts have ruled in favor of native tribes exist – such as in the case of casino lending with the Lac du Flambeau Band of Lake Superior Chippewa reported by the Wall Street Journal – legal experts would not be surprised if Western Sky Financial’s protection continues, inseparable from Webb’s personal status.

Sources

Center for Public Integrity
Wall Street Journal
Western Sky Financial

Western Sky Financial: No collateral required

Illinois Lending Corp. says the installment loans provisions of the Illinois Payday Loan Reform Act are unconstitutional. (Photo Credit: CC BY-ND/Jamison Faught /Muskogee Politico)

Beginning March 21, Illinois consumers may not have the option to choose installment loans for their emergency short term credit needs. At least one payday lender in the state is not taking what it calls unconstitutional changes lying down, reports Crain’s Chicago Business. Illinois Lending Corp., which operates six Chicago-area payday loans outlets, has filed suit in Cook County Circuit Court, claiming that its business will be irreparably harmed if the slightly longer-termed installment loans are not allowed.

Prohibition of installment loans

Unlike payday loans, installment loans have a slightly longer term, offering consumers repayment flexibility at an additional fee. This applies at the customer’s discretion, should the standard two-week payday loan term be insufficient. According to Illinois Lending Corp., prohibiting installment loans violates the company’s constitutional rights to due process and equal protection.

As it stands, two of the more problematic parts of the new Illinois Payday Loan Reform Act for lending corporations like Illinois Lending Corp. are:

• Borrowers cannot have installment loans for more than 45 days
• A new 56-day repayment period at no additional charge for borrowers who have trouble repaying

While payday lenders are not looking to exploit borrowers who are having difficulty repaying, giving them a 56-day installment loan with no finance charge attached is untenable, says Illinois Lending Corp. The company’s 2010 business records show that it made more than 7,000 installment loans and about 700 payday loans last year.

Eliminating consumer choice

Illinois Lending Corp. is asking the court to block the provision within the Illinois Payday Loan Reform Act that would bar payday lenders and their affiliates from offering installment loans.

“There is no evidence that consumers have been injured where both (installment and payday) loan products are offered in the same place of business,” the lawsuit states.

Consumer advocates want to maintain fragile compromise

Lynda Delaforgue, co-director of Chicago-based consumer advocacy group Citizen Action/Illinois, believes that if the court grants an injunction against any portion of the Illinois Payday Loan Reform Act, the other compromises struck between the short term credit industry and the state will be torn down.

“There’s the potential for consumers to be bounced back and forth between the (consumer installment and payday) products,” Delaforgue told Crain’s.

However, by uniting the products by offering both under the same roof, payday lenders say they’re offering consumers both convenience and choice. The Illinois Payday Loan Reform Act arguably threatens consumers on both grounds. Consumers who have difficulty obtaining emergency short term credit elsewhere depend upon payday loans and installment loans, according to numerous studies.

Sources

Crain’s Chicago Business
Debt Consolidation Care Forum
Illinois Payday Loan Reform Act

Restricting credit hurts consumers and payday lenders

Student loans for middle-income students are available for those willing to put in the legwork. (Photo Credit: CC BY-ND/Federal Student Loan Debt)

Financial aid is a necessity for many low- to middle-income students and their families. Thankfully, there are student loan programs designed specifically for people who fall within the low- to middle-income brackets. Banknote suggests those looking for ways to pay for college use this three-pronged attack.

Aim high for need-based qualification

If a student doesn’t qualify for student loans at one college, it is quite possible that student could qualify at a more expensive university. Sally Donahue, Harvard’s director of financial aid, points out to Banknote that need-based financial aid is contingent upon income and assets, relative to admission costs. Thus, not qualifying at a $20,000-per-year school doesn’t mean a $60,000-per-year option is out of the question.

“We have probably 600 families with incomes over $180,000 receiving grant aid right now, and that’s usually because they have two or three students in high-cost colleges,” says Donahue. “It just depends on where you go.”

Harvard happens to be a “no-loan” school that enables students to obtain the necessary financial aid via grants, scholarships and work-study programs. The Institute for College Access and Success indicates that there are more than 50 such no-loan schools across the U.S. from which to choose. Keep in mind that most require family income to be below $50,000 annually.

Tax credits offer long-term help

Carol Stack, co-author of “The Financial Aid Handbook,” claims that 2011 is a banner year for student loan tax credits. Specifically, the American Opportunity Credit is one to watch. Extended through 2012, this credit can mean an extra $2,500 for families, as long as at least $4,000 is spent each year on college-related expenses. Intended for the first four years of post-secondary education, the American Opportunity Credit applies 100 percent to the first $2,000 spent during the tax year, and 24 percent to the next $2,000. At least half-time enrollment is required and family income must not exceed $160,000 per year. Check with the IRS for more information.

The Lifetime Learning Credit is great for part-time students and those who attend college for more than four years. Approved college expenses up to $10,000 are reimbursed at a 20 percent clip.

Good aid for good students

Merit-based aid exists for men and women who may not qualify for need-based student loans, grants or scholarships. Collegiate financial aid search engines, like College Navigator and Meritaid.com, state that $11 billion in merit-based aid is distributed annually. Thus, there are plenty of opportunities for good students to take advantage. Chris Long from Cappex, a Meritaid.com sister company, advises students to find schools outside their geographic area that would benefit from their test scores and GPA.

“You should also apply to schools where you’re at the upper end of the academic scale. You’re going to be very attractive to those schools because they want to increase their average GPA, SAT and ACT (scores),” he said.

Sources

Bankrate

Cappex

College Navigator

IRS.gov

Considering scholarships and grants

Consumer borrowing rose from non-revolving credit sources, as fewer people are borrowing money by using credit cards. Photo Credit: MoneyBlogNewz/Flickr/CC-BY-SA

An increasing number of people are borrowing money, but more people are getting personal loans rather than using credit cards. The Federal Reserve released data that show consumer borrowing rose by several billion dollars in January, but it was from non-revolving credit sources. Credit card use dropped at the same time.

Debt levels rise as consumer borrowing increases

Americans are borrowing money from loan lenders again, and it is reflected in the recently released report by the Federal Reserve detailing economic activity from January of 2011, according to Business Week. The increase in consumer debts in January was fueled by non-revolving credit sources, such as personal loans or auto loans, instead of revolving lines of credit or credit cards. Non-revolving debt increased by $9.26 billion, but consumer debts increased overall by an estimated $5 billion, in the fourth straight month of increasing numbers of people going to loan lenders for credit. The increase was fueled by strong auto sales, according to MSNBC, as the amount of money lent for auto purchases increased for the sixth straight month.

Credit card use falls

Credit card use has been plummeting for some time, as the amount of debt held by Americans on credit cards declined by $4.25 billion. Credit card debt has fallen in 28 of the past 29 months, but it increased in December 2010 for the first time since December 2008. Credit card charge-offs, or debts written off by credit card companies, declined to 7.45 percent for January 2010. Delinquencies and charge-offs have been declining for the past five consecutive months. Consumers appear to have used their plastic to cover a December shopping spree but paid down the balance quickly. Credit card interest rates have been steadily rising as new regulations prevent banks and card companies from applying fees surreptitiously, forcing them to raise fees and interest rates up front.

Student borrowing increases

Part of the increase in non-revolving debts for the month of January 2011 was a $24.9 billion increase in student loans from the federal government. However, students are likely to begin borrowing more from private lenders than from the government in coming years, as the looming federal budget cuts are likely to decrease available capital. The federal budget recently submitted by the House of Representatives cut more than $5 billion from the Pell Grant program, according to the Christian Science Monitor, though the Pell Grant program is expected to run a $20 billion deficit starting next year. A college education is still viewed as one of the most worthy investments a person can make, though the cost has been rising dramatically for years.

Sources

Business Week

MSNBC

Christian Science Monitor

Those who can qualify for financing can get low cost loans for homes. Image from Wikimedia Commons.

Interest rates on mortgages have fallen recently, meaning mortgages can be very low cost loans for people who can qualify for the financing. Rates for 30-year fixed, 15-year fixed and five-year adjustable mortgages are beginning to slip again after housing data indicates growth has stalled in real estate. A double dip housing recession may be possible.

Those who qualify could get a steal on a home

Currently, the market rates for home loans are starting to trend downward as demand is waning for housing. Buyers who qualify may be able to get some seriously low cost loans. The market rate for adjustable rate mortgages is hitting all time lows, as a five-year adjustable rate mortgage, or ARM, recently fell to 3.72 percent from 3.80 percent, according to MSNBC. That is up from February, when five-year ARMs hit a market rate of 3.23 percent. The average rate for a 30-year fixed mortgage hit 4.87 percent, more than the rate observed in November, when 30-year fixed mortgages hit a 40-year low of 4.17 percent. The going rate for 15-year fixed mortgages is currently 4.15 percent.

Double dip possible

A second recessionary period in housing could be on the horizon, according to CNN. That doesn’t mean a person will ever be able to purchase a home by taking out a couple of payday loans, but it won’t be pleasant to watch the real estate industry to slip even further into the abyss. Robert Schiller, co-founder of the Case-Shiller Index, says there is potential for the prices of homes “falling another 15, 20 or 25 percent.” Given that housing prices are near to the lowest levels since the great housing crash of 2008, a double dip in real estate seems plausible. If it were to happen, it could mean further bad news for an already shaky economy. Since states rely partially on property taxes, lower values mean lower revenues and that would lead to more states having serious budget woes.

The virtues of renting

Since the latest recession began in the housing market, it has called into question whether it is better to rent or buy. Buying a home can pay off, provided that a person buys when values are down and sells the home when values are up. It also helps to have paid off the mortgage or to have gained a good share of equity. However, renters pay no property taxes and have to do little, if any, maintenance. Granted, renting means having to part with more instant cash every month than a homeowner.

Sources

MSNBC

CNN