A new report has been released by the Center for Responsible Lending, slamming payday loans lenders. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

The Center for Responsible Lending has released a new report on payday loans, bashing the product. The CRL is among the chief lobbyists against the payday lending industry, though it allies itself with other consumer credit causes. Payday lending will soon fall under the jurisdiction of the Consumer Financial Protection Bureau.

Payday lenders blasted for lending practices

Payday lending is often reviled as predatory, as opponents accuse payday lenders of trapping people into vicious cycles of debt. One of the leading advocates for reform or eradication of the practice is the Center for Responsible Lending, a consumer advocacy foundation that conducts research and lobbies on behalf of consumers. The organization has released a new report on payday lending, according to Daily Finance, asserting that people who take out payday loans tend to get trapped into debt for more than a single pay period. The report is titled “Payday Loans Inc: Short on Credit, Long on Debt” and is available on the CRL’s website.

Frequent targets

Payday lenders are often targets of increased regulation and of ardent criticism. Some lenders deserve it; the number of violations committed by payday lenders as well as the number of lawsuits including class actions show that not all short term loans lenders are on the level. Many are hoping for payday loans as an industry to get reigned in by the Consumer Financial Protection Bureau when it begins operation later this year, as many advocates have asserted a cap on repeat borrowing will be effective, though the CFPB will not be able to regulate interest rates. The CRL recommends the CFPB should do as much.

Credit involves risks

The scholarly literature that exists on payday loans and similar credit products indicates there is a risk of consumers falling into a fair amount of debt once they begin borrowing from payday lenders. For instance, the CRL report asserts that many people are indebted to a payday lender for one to two years. That’s better than 30 years, the length of the typical mortgage. That is also better than 10 years, the length of time that people are given to repay student loans. However, those debts don’t have the stigma that payday loans have been bestowed with. Credit cards are also seen as more respectable than payday loans even though a minimum payment schedule can keep a person in debt to credit card companies for decades.

Sources

Daily Finance

Center for Responsible Lending (PDF – Requires Adobe Reader)

ZestCash is using "Google-style" data crunching to offer flexible repayment plans for online loans up to $500. Image: Thinkstock

ZestCash is a new online lending operation to serve the underbanked launched by a former executive of Google. ZestCash online loans of up to $500 became available in Utah starting Wednesday. The company said it will use data, Google-style, to minimize risk and maximize benefits for its customers.

A new way of online lending

ZestCash was founded by former Google CIO and VP of engineering Douglas Merrill. TechCrunch reports that ZestCash customers get to choose how much money they want to borrow (up to $500) and how long they want to take to pay it back. As customers choose their loan terms, the ZestCash website helps them arrive at a manageable repayment schedule by showing them how the weekly payment is affected by time. Loans are repaid in smaller installments instead of all at once. When a customers take out a loan online, a full payment schedule showing when each payment will drawn from their accounts is provided. ZestCash also pledges to be flexible with individual borrowers about late payments.

Lending Google-style

ZestCash is entering a huge and growing market. According to the Center for Responsible Lending, about 12 million people take out payday loans each year. The payday loan industry lent about $20 billion last year. According to the FDIC, about 18 percent of U.S. households — 60 million people, are underbanked, meaning they don’t have established relationships that will allow them to borrow from a bank. Merrill told Reuters that ZestCash will use “Google-style data” to help customers only take out loans they can afford. He claims that applying technology learned at Google to loan underwriting will bring the benefits of decent credit to millions of people who never had it before.

Better loans through data crunching

Payday loan companies determine their fees based on the risk involved with no credit checks. Quentin Hardy at Forbes said that ZestCash will analyze risk in a “Google-like data crunching way” that is new to the online lending industry. Merrill told Hardy that ZestCash lending decisions will be based on “research in economics, math and computer science.” Data will be gathered through phone calls, customer questionnaires and information scraped from the web by ZestCash engineers. In true Google fashion, Merrill said “we believe all data is useful credit data.”

Lessons that help teach responsible borrowing or responsible lending should start at a young age. (Photo: ThinkStock)

Despite large problems like a state budget that remains in shambles due to rampant government spending, California legislators are reportedly hard at work to come up what they consider to be a responsible lending approach to payday lending. Unfortunately, they abandon the concept of a self-regulating free market economy by mistaking shackling payday lenders with being responsible. The more legislators squeeze the system in which payday advances are distributed, the more difficult it becomes for quick loan outlets to turn any sort of profit, argues the responsible lending outlet Pay1Day in a recent press release.

Responsible lending means exercising informed choice

A balanced view of America’s free market economy suggests that hyperactivity to ban payday advances does not constitute a move toward responsible lending. The reality is that the facility and expense of such quick loans from payday lenders are much more relative. The recessionary economy and its resulting credit crunch have limited the options for many consumers who need short term credit. Unemployment and underemployment don’t make this crucible any easier to bear. Bills still must be paid; life’s emergencies continue. Legislators who live comfortably on their legislator salaries have proved themselves largely unable to walk in the shoes of their financially modest constituents and understand the need for payday advances. Hence, they don’t see the ill in removing such choices from the short term credit market with overzealous regulation.

Weighing expenses vs. consequences

Pay1Day points out that the bulk of quick loan customers use the product not for impulse purchases, but to help them avoid less desirable financial alternatives. More expensive avenues such as checking overdraft, utility shut off or mortgage default can be avoided if consumers have the option to pursue other forms of short term lending that are available even when credit scores are low. While it is true that the APR on a payday loan can be expensive in a relative sense if other types of bank loans are available, credit-constrained consumers generally don’t qualify for small scale bank loans at ultra-low interest rates.

Where do the charges for payday advances come from?

Contrary to the belief of groups like the Center for Responsible Lending, payday lenders do not charge rates in the neighborhood of 391 percent APR (for a standard two-week loan) simply because they can. Taxes and other legislation create operating expenses that lenders must recoup in order to function. If legislators squeeze harder, most lenders will close their doors and jobs will be lost by the thousands. Consumers who need access to short term credit are hurt in the process.

Thus, Pay1Day suggests that California and other states can maintain price-regulating competition in the market and inform consumers about their lending choices through educational programs. Educated consumers should be allowed to make their own choices. A nanny state that spoon feeds is less than desirable. A government that places heavy restrictions without any real efforts at education is far from a responsible government.

Sources:

PR Newswire

Benzinga

America’s real OK Corral for responsible lending – the mortgage crisis:

It doesn't take much detective work to discover the payday loan truth. (Photo: ThinkStock)

In the financial news industry, the media will periodically run an anti-payday loan story in which the same talking points are used. In the case of a recent Lansing State Journal article entitled “Going with payday loans might not be worth fees,” those talking points include 391 percent annual interest and varying levels of state regulation. As we’ll see, these are instances of politically convenient bullet points that fail to address the full reality of taking out a payday loan.

A payday loan in Michigan is not an annual loan

For consumer convenience, the Truth in Lending Act (a federal law) requires that all consumer loans – including payday loans – clearly advertise the annual percentage rate (APR) charged. For an annual loan, this is useful. However, while a payday loan is a consumer loan, it is not an annual loan. In Michigan, the average fee (interest) charged per $100 on a two-week payday loan is about $15. That’s 15 percent, or $15 dollars above the principal loan amount. The Journal reporter admits that the payday loan in Michigan ranges in term from as little as seven days to as many as 31 depending upon the lender, although two weeks is standard. Does that sound like an annual loan to you? If it were, you’d be paying 391 APR in interest. For a two-week payday loan, $15 is 15 percent interest paid.

Some lenders charge more than others

The Lansing State Journal is right to advise consumers to “be careful.” Researching the best lender rates ahead of time makes sense and is advised by any pro-payday loan group worth its salt, including the Community Financial Services Association. While some lenders charge $15 per $100 loaned, others may charge more. It varies by lender, and regulations vary by state.

However, the example the Journal uses is suspect because of its lack of context. A payday loan customer named William Lee claims he had to pay back $400 for a $250 payday loan. There is no mention of whether Mr. Lee defaulted on his loan, perhaps because he borrowed more than he could afford to repay. There is also no mention of any other loan terms. As the Michigan Office of Financial and Insurance Regulation allows a maximum of $35.50 (plus a 45-cent database verification fee) charged on a $250 transaction, it seems likely that Mr. Lee either defaulted or the lender he used was operating under the radar. It’s impossible to say for certain based on the article, which makes the Lansing State Journal’s piece nothing more than an unsupported scare piece straight from the Center for Responsible Lending’s playbook.

Do your research, and don’t choose based on emotion

A payday loan can be a useful tool in the right situation. If a consumer shops for the best rate and avoids borrowing more than they can afford to repay on their next payday, there should be no trouble. Impulsive action can lead to financial ruin, whether a consumer is looking for a payday loan, a mortgage, an auto loan or a host of other things. Research lenders online, make sure you understand fees charged before you apply and let the numbers do the talking. The annual APR scare tactic the Lansing State Journal and Center for Responsible Lending use is just that.

Sources:

Lansing State Journal

Truth in Lending Act

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The burden of proof can be a mighty weight, can't it, Mr. Eskow? (Photo: Flickr)

Richard Eskow, a private-sector consultant who works for corporations and organizations that include the World Bank, is rather miffed about what Lawrence Meyers had to say regarding Eskow’s anti-payday loans argument. While Meyers is something less than professional in the manner in which he addresses Eskow (referring to him as a “simple child”), the exchange does raise some very real questions about some of the claims Mr. Eskow makes in his recent Huffington Post article “Usurious Payday Loans: Myths, Flawed Studies, and Solutions.” Much of Eskow’s criticism of the payday loans industry seems to center on how the industry allegedly targets and exploits the poor and minorities. As we’ll see, however, one who lives in a glass house should not throw stones.

Richard Eskow and the World Bank

Keep this in mind: Richard Eskow is closely allied with the World Bank. And according to the World Bank’s Articles of Agreement, its aim is to “assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes.” Yet, as the Bretton Woods Project, the World Bank imposes conditions on countries that borrow based on what is called the “Washington Consensus,” as opposed to the specific needs of the borrowing country.

Loans originated by the World Bank have been criticized for being rather unethical; for instance, Bretton Woods cites an example in which hydroelectric dams were funded and constructed even though doing so displaced indigenous people who lived in the area. Partnering with the private sector, as the World Bank does, has also raised concerns of undermining the role of individual states to provide essential goods and services, which Bretton Woods claims has caused shortages of such services in “countries badly in need of them.”

This is what Richard Eskow supports?

It’s strange that Eskow supports this, because by the end of his Huffington Post rant, he seems to think it’s actually a good idea to allow states to make their own decisions regarding payday loans. But only moments before, he proposes that Congress form its own agency to regulate payday loans out of business.  It seems there’s some conflict in Eskow’s mindset over payday loans and other financial matters, if not out-and-out hypocrisy. However, let’s view the meat of his argument against payday loans, which is of primary interest.

Payday loans ‘exploit helpless people,’ claims Eskow

This is an argument that the pro-big bank establishment has used for years. Those with a religious bent go so far as to connect payday loans with usury, which is far from correct. Usury amounts to excessive and unlawful charging of interest. Payday loans do not qualify on either of those counts, and hence do not connect so neatly to Eskow’s concept of usury. Eskow cites anti-payday loans studies funded by such anti-payday loans industry groups as the Center for Responsible Lending as support for his arguments. He also pokes at pro-payday loans studies by saying that they’re often funded (at least in part) by pro-payday loans groups.

At worst, these two things could cancel each other out. That would still leave Eskow on the grounds of the legal logic where the burden of proof rests upon the accuser. But the Center for Responsible Lending was founded by Herb and Marion Sandler (mavens of the subprime mortgage crisis) and is backed by Martin Eakes of Self-Help Credit Union/Self-Help Inc. A great deal of doubt exists as to whether any of those sources are reputable when it comes to financial responsibility. Thus, Eskow’s anti-payday loans material could easily be viewed as the weaker of the two sides.

READ ON to see whether Eskow is right in claiming that payday loans exploit the powerless…

(Photo Credit: http://www.flickr.com/photos/lightmatter/ / CC BY 2.0)

Sen. Kay Hagan (NC-D) - Have John Paulson and the CRL done anything for YOU lately?

The Center for Responsible Lending recently worked hand-in-hand with North Carolina Senator Kay Hagan (D) to “help craft” the Payday Lending Limitation Act of 2010, reports the Payday Loan Industry Blog. The major purpose of this new bill, it would seem, is to change the parameters of the Truth in Lending Act (TILA). While the specifics of the bill text will not be available to the general public until it is presented to the Senate in the upcoming weeks, it appears that the Payday Lending Limitation Act of 2010 is ostensibly another attempt to blame America’s financial crisis on the payday loans industry. The bill would empower the federal government to replace state-by-state consumer lending regulation with their own highly stringent rules.

Payday Lending Limitation Act of 2010: Another CRL manifesto

The Center for Responsible Lending (CRL) is allegedly responsible for the thrust of the Payday Lending Limitation Act of 2010. For those unfamiliar, the CRL plays consumer advocacy group before the cameras and bright lights, but when it’s time to wipe of the grease paint, their truth hurts. Not only were they founded largely by Herb and Marion Sandler, who made a fortune in the sub-prime mortgage market that was largely responsible for bringing America’s economy to the brink of destruction, but there are other damning ties. Numerous connections exist between the Sandlers, the CRL, Self-Help, Inc. and affiliate Self-Help Credit Union (the latter two founded by Martin Eakes, who is also the chairman of the CRL).

In essence, affirmative action initiatives were used to strong-arm banks into writing adjustable-rate mortgages for people who were unlikely to be able to afford them. At the same time, groups like Goldman Sachs were contributing to the mortgage mess, claiming those sub-prime mortgages were a good investment to fool investors while betting against the success of those investments behind the scenes. And guess what? Hedge fund billionaire John Paulson, who is intimately involved in the recent mortgage investment scandal, was a major financial contributor to Goldman Sachs AND was one of the major founders of the Center for Responsible Lending! How credible are the Center for Responsible Lending’s claims that they want to protect the little man, in light of those heavy connections?

Skip the Payday Lending Limitation Act of 2010, Congress

Instead, investigate the Center for Responsible Lending at the same time that you go after Paulson, Goldman Sachs and everyone else associated with this greedy mortgage investment game. There is at a bare minimum suspicion by association, and there is a documented money trail. Payday lending, when used properly, is a useful venture for short-term consumer funding. Adjustable rate mortgages and unscrupulous investment companies that are betting on deceived investors to fill their coffers have no proper place in a legal, functional economy. Their avarice is a blight, and Sen. Hagan would have been better-served if she’d asked Scrooge McDuck to write the Payday Lending Limitation Act of 2010. He has more heart and care for the common man.

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