Credit reporting agency Teletrack has been fined nearly $2 million by the FTC for illegally selling credit reports. Photo Credit: TrinityCreditServices/Flickr/CC-BY

Credit reporting agency Teletrack, which specializes in subprime credit reports, has been fined by the FTC for selling credit reports illegally. The agency was found to have sold credit reports to payday loan lenders and has to pay $1.8 million in fines to the Federal Trade Commission.

Company cited for selling credit reports for marketing purposes

The Federal Trade Commission has slapped credit rating agency Teletrack with $1.8 million in fines for illegally selling credit reports to payday loan companies for marketing purposes, according to WalletPop. Teletrack has agreed to pay the fines, but insists that it acted entirely within the law. The FTC says the company violated the Fair Credit Reporting Act, which prohibits the selling of financial information such as credit histories or borrowing habits of customers or similar information for any reason other than a “permissible purpose,” according to Statesboro Business and Lifestyle Magazine. Marketing is not a permissible purpose.

Huge presence in subprime credit market

Teletrack is one of the largest subprime credit reporting agencies. It reports the credit history and activities of hundreds of thousands of people who use subprime credit products. Also known as alternative financial services, Teletrack compiles data on people who borrow payday loans, purchase furniture through rent-to-own companies, use car title loans or get an auto loan through non-prime lenders. The FCRA doesn’t prevents companies like Teletrack from providing information when asked for a credit check and paid by a second party, but selling information to third parties for non-approved purposes is grounds for an FTC lawsuit, according to Forbes.

New rules for credit scores

Until the past few years, it was fairly difficult for consumers to obtain much information about their credit history or learn about how that information is being shared with their creditors or third parties. Part of the financial reform laws of the past few years include new rules and regulations concerning credit reporting and credit scores, according to NASDAQ. The Dodd-Frank Act created the new rules last year, and the Federal Trade Commission and the Federal Reserve are implementing them this year. Now, any creditor that uses a credit score as a factor in creating the terms of a loan must tell consumers what their credit scores are.

Sources

WalletPop

Statesboro Business and Lifestyle Magazine

Forbes

Nasdaq

No, not a tattoo OF a dog. A tattoo ON a dog. Image: Tattoo Lover/Flickr/CC BY

In this stagnant economy, an entrepreneur has found a new way to make money. Antonio Smith’s Atlanta-based company Tasq Media Advertising is offering an alternative to payday loans. In exchange for a short-term loans, borrowers agree to let the company tattoo logos onto their pets.

Permanent logos on your pet

To ease that steady burden of debt and need for quick cash, Smith and his company are offering small short-term loans, usually from $50 to $200, which will be deducted from a client’s bank account when they receive their next paycheck. In exchange, the borrower’s pet is permanently tattooed with an advertisement or a company logo, the advertiser pays Tasq Media, and Tasq Media lets the client borrow a small amount of money. Clients must also agree to walk their pets three times a day for exposure.

Smith says procedure is harmless

The procedure, Smith says, is harmless to your pet. The animal is first put under anesthesia. Once asleep, it is shaved and the logo is inked in with tattooing needles. The pet awakens with no memory of the ordeal, according to Smith.

Reaction from the blogosphere

The new enterprise has drawn some angry and immediate reactions. M. Jones of Tattoo Blog said:

“If there’s one thing that really makes my blood boil when it comes to tattoos, it’s people using the art form as a method to cash in and make big bucks.” In direct response to Tasq Media’s enterprise, Jones added, “Not only do I object to this on the level of tattoo being used as a cheap, gutless marketing ploy, but I object to this on the level of animals being used as billboards.”

After a string of expletive-laden insults, Jones concluded his post with, “Where’s PETA when you actually need them?”

‘The Sellionaire’

Smith, also known as “The Sellionaire,” is an entrepreneur who sells motivational tapes on his website. His book is currently in bookstores.

Sources

Tattoo Blog
PR Newswire
The Sellionaire

Once seen as seedy, pawn lenders are now more high-class. Photo Credit: Infrogmation/Wikimedia Commons/CC-BY-SA

There has been an explosion in recent years of pawn brokers and pawn lenders becoming far more high-class. As a result, there has been a surge of sympathetic media portrayals of pawn lenders and high-end brokerages, both nationally and internationally.

High-class pawn brokers more commonplace

In decades past, getting a loan from a pawn broker was seen as an act of last resort. Many considered other alternative financial services like payday loans or car title loans first. But that perception now tends to clash with the image of more high-profile pawn operations. For instance, the online pawn brokerage Pawngo has been generating buzz in the financial press, as the company was featured several weeks ago on the Forbes website. Pawngo is currently backed by Lightbank, the same company that provided funding to another online company that recently exploded in popularity, Groupon. To get a loan from Pawngo, one simply ships the property via FedEx, and gets the money once the item is received.

Pawn broking on the rise in recession

Since credit is somewhat scarce — even for the opulent — many people still need short term loans. Many American cities are starting to see a surge in the number of pawn shops, and especially those that cater to discerning clients. A recent article in the St. Petersburg Times describes pawn shops that are making larger loans for wealthier clients. One store, the Gold and Diamond Center in St. Petersburg, Fla., is the same store where former governor Charlie Crist bought a 5-carat sapphire ring with which he proposed to his wife.

Another store, Cappello & Co., typically provides pawn loans to businesses, but also makes loan against jewelry, boats and other large assets. The store recently held property including a Bentley automobile, a Picasso painting, at least one airplane, several boats and a Ferrari.

To attract the growing pawn business, the city of Mankato, Minn., recently voted to allow more pawn brokers to open up shop in the city, according to the Mankato Free Press.

Trend continues, thanks to TV

Over the past few years, there have been reality television shows such as “Pawn Stars” and “Hardcore Pawn” that have increased the notoriety of pawn lenders. “Pawn Stars” in particular featured some incredibly valuable items going through the store, and “Hardcore Pawn” recently featured a Las Vegas couple selling the show’s stars a Ford Mustang that once belonged to Lee Iaccoca, according to the MustangEvolution blog. The increase in status for pawn lenders isn’t even unique to the U.S. According to the Financial Times, a new store of the incredibly long-lived and respected pawn broker Suttons & Robertsons just opened on London’s Fleet Street, next door to Goldman Sachs.

Sources

Forbes

St. Petersburg Times

Mankato Free Press

Mustang Evolution

Financial Times

White House adviser Elizabeth Warren is in charge of setting up the CFPB. Image: Leader Nancy Pelosi/Flickr/CC BY

The U.S. Consumer Financial Protection Bureau (CFPB) is set to open next month in spite of attempts by Republican Senators to stop it. The bureau, which is the result of last year’s Dodd-Frank Act, is seeking input as to which financial entities it needs to regulate in addition to banks.

Bureau to police the consumer financial industry

The 2010 Dodd-Frank Act, which created the bureau, states that it will regulate banks with more than $10 billion in assets as well as payday lenders and non-bank providers of home and student loans. The act does not define, however, what other “larger participants” of the financial markets it should cover.

Created by the Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a federal statute that President Obama signed into law July 21, 2010. The law seeks to regulate the financial services industry to an unprecedented degree. From it, the CFPB was born, under White House adviser Elizabeth Warren. The stated mission of the bureau is to “make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.”

“Consumers deserve the peace of mind that financial companies — both banks and non-banks — are following the rules,” said Warren. The bureau has until July 2012 to determine which industries will be regulated and in what ways.

Non-bank industries to be targeted

In a statement released Thursday, the bureau stated several “larger participants” that could be targeted. Those include consumer credit and related activities, consumer reporting, check-cashing, money transmitting, debt-relief services and prepaid cards. However, the bureau is also asking for input into which industries it should oversee.

Republican resistance

The bureau has met resistance from the start by Capitol Hill conservatives. The bureau can’t begin its work until a permanent director has been appointed, and some Senate Republicans have vowed to block anyone the president may nominate for the job. The bureau, however, is continuing to lay its foundation for the scheduled opening on July 21.

Bureau opposed by banks

Bank lobbies have also opposed the creation of the bureau, arguing that it will lead to fewer loans and fewer financial choices for consumers. They say it will have a negative effect on economic growth.

Sources

Reuters
Advisor fyi
Fox

People should watch for payday loan collection scams, which are usually conducted over the phone. Image from Wikimedia Commons.

Though any form of credit, from mortgages to payday loans, carries some risks and responsibilities, those risks do not include putting up with illegal activity. Unscrupulous people are trying all sorts of methods, including payday loan collection scams, to try to bilk people out of money.

Arkansas Attorney General sues Kansas firm for illegal collections

A Kansas-based debt collection firm is being sued by Arkansas Attorney General Dustin McDaniel for attempting to illegally collect debts the company claims are owed to payday loan lenders by citizens in the state of Arkansas, according to ArkansasNews. McDaniel has sent National Credit Adjusters two requests for information concerning its attempts to collect payday loan debts in Arkansas, but the Hutchinson, Kan., firm has not responded to either. According to a post on the Attorney General of Arkansas website, payday loan lending is illegal in Arkansas, and the debts are therefore not collectable, according to the Attorney General’s office.

Beware collectors posing as cops

A popular trick among some unscrupulous debt collectors and scam artists is to call people and pose as either state officials or police officers. People in North Carolina, according to WFMY, a CBS affiliate in the Raleigh, N.C. area, have been receiving phone calls from telemarketers posing as agents of the Federal State Bureau of North Carolina saying that people owe a debt and have to pay up right away or be arrested. An Ohio man, according to Credit.com, was contacted by lawyers for the Brooklyn County Court and told he owed a payday loan company almost $800 for a loan and collection fees, though he had only applied for an online loan but did not take it. Similar phone calls, involving a “thick accent” and posing as an official through the non-existent Brooklyn County Court, have been observed across the country, and many people who received such calls had recently applied for a payday loan online.

Forewarned and forearmed

Debt collections fall under the Fair Debt Collection Practices Act, and people who feel a debt collector is not abiding by these laws should complain to their state attorney general’s office and the Federal Trade Commission. Ask for a statement in writing, as a debt collector is required to provide one. Do not stand for tactics of intimidation; it is illegal for debt collectors to be abusive when trying to collect a debt. Also, if a debt collector claims to be an attorney, ask for the person’s name and proof of membership in the state bar association. Impersonating an attorney is a crime, and consumers should never hesitate to ask for credentials.

Sources

Arkansas News

Arkansas Attorney General’s Office

Credit.com

WFMY

Fair Debt Collection Practices Act

Are payday loan cases clogging Utah courts? / Image: bloomsberries/Flickr/CC BY-ND

A recent study indicates that payday loan cases are clogging the courts in Utah, particularly in the city of Provo. But payday lenders say the report is biased and misleading.

80 percent of all small claims cases

The Coalition of Religious Communities reports that payday loan cases made up 80 percent of all small claims cases in the district court of Provo, Utah, between 2005 and 2010. The report further claims that payday loan cases make up 70 percent of justice court cases in Provo and 62 percent of all cases in Utah County. “The sheer number of cases adds to already severely backlogged court dockets,” the study concludes.

“We went to court one day, and in 35 minutes, they looked at almost 800 cases,” said Linda Hilton of the Coalition of Religious Communities.

One firm especially guilty, report says

Hilton says one large firm, Check City, has a particularly unfair policy. The company’s contract has a clause requiring all prosecutions to be handled in Provo, where it is headquartered. This causes an undue hardship for borrowers living in other parts of the state, claims Hilton.

A spiral of debt?

An editorial in the Daily Herald claims that, in essence, the taxpayers are paying for the collection agency of a controversial industry. The editorial goes on to surmise that the volume of cases supports the idea that people who are financially desperate enough to take out payday loans will continue getting into deeper debt.

“We had this feeling from the clients that were coming in that something was not right,” Hilton said. “But our experience here is that most people are in debt for months and months.”

Most cases default

Reannun Newton, a Provo City Justice Court administrator, disagrees. “Because most of them go to default, they process pretty quickly.” She went on to explain that, though the court may have several hundred payday loan cases a day, typically only about 10 people will show to contest them. “It is a lot of cases, but anyone who files a small claim has to pay a [$65] filing fee.”

Courts generate revenue

“Not only are these court cases not burdensome on city government or taxpayers, but the courts are generating revenue for cities and counties, thus benefiting local tax payers,” said Wendy Gibson, community relations director for Check City.

Taking it to the lawmakers

Republican Congressman Brad Daw of Orem claims to be looking at what other states are doing about payday loan regulation. He has suggested that limiting borrowers to one loan per paycheck might be one possibility. Linda Hamilton plans to take the Coalition’s report to lawmakers before this year’s session is out.

Sources

Desert News
Daily Herald

Visit America's Credit Unions website to find a credit union near you. (Photo Credit: CC BY/John Benson/Flickr)

One of the most important decisions consumers can make regarding their money is where to keep it. Banks are a common option, but those who have tried depositor-owned credit unions will argue that the advantages over banks make them quite worthwhile. Here are a few of the advantages of choosing a credit union versus a bank.

Shareholder versus depositor interest

While large commercial banks are the domain of corporate shareholders – and hence most concerned with generating profits for a small, select group – credit unions belong to the members. Volunteer customers even serve on each credit union’s board of directors. The sense of shared ownership is reflected in the name credit unions give to checking accounts: share draft accounts.

Interest rates on loans are generally lower at credit unions than banks, and the rate of return on deposits can be significantly higher, particularly on CDs. A credit union’s responsibility to its depositors is highly desirable for the average banking customer.

Smaller size, better individual care

Considering that credit unions are smaller than most banks and generally have fewer overall customers, the opportunity for greater individual care from a financial professional exists. The tradeoff here is that ATM networks may be smaller with credit unions, and the list of services provided will be slightly abbreviated when compared with those of a large bank.

NCUA stability

The banking crisis has caused many smaller banks to go under. Larger banks have depended upon federal bailout money and taxed the reserves of the Federal Deposit Insurance Corp. to the limit. Credit union deposits are insured against loss by the National Credit Union Administration, and the number comparison is telling, reports Bankrate. From the beginnings of the financial crisis through May 2011, 44 FDIC-insured banks failed, versus only nine NCUA-insured credit unions. This disparity exists largely because banks made more risky loans in their drive to boost shareholder profits.

Payday loans at a credit union near you

Recent programs instituted by the NCUA, such as Better Solutions, have enabled credit unions to offer payday loans and similar short term loans to customers at annual interest rates that top out at about 28 percent. A 30-day repayment period is required, and the number of loans a customer can take within a six-month period is limited to three.

Banks versus credit unions

Sources

America’s Credit Unions

Bankrate.com

MonitorBankRates.com

As states try to get rid of payday loans, other types of loans pop up in their place. Photo Credit: AR McLin/Flickr.com/CC-BY

Virginians frequenting pawn shops and title lenders more

Many states have passed laws intended to closely regulate, if not outright eliminate, payday loan lending. However, such laws don’t eliminate the need or demand for a short term credit product. The state of Virginia passed laws several years ago capping the interest rate on payday loans, which has reduced use of that particular product but not demand for financial help. Up to 10 percent of all Virginia households were estimated to have used some sort of alternative financial service, according to BusinessWeek, in a recent study done by the University of Virginia. Four percent of Virginians reported using payday loans at some point and 3 percent frequent pawn shops. Between 2004 and 2008, 70,000 Virginian households used refund anticipation loans and between 2005 and 2009, almost 150,000 Virginians used car title loans.

New class of lenders

Some of the most frequent laws passed against payday lending mandate loan repayment be done over a period of more than two weeks. The state of Colorado passed a law a year ago making the repayment period six months instead of a couple of weeks, according to the Greeley Gazette. As a result, former payday loan lenders are offering six month installment loans. When Arizona let the law allowing payday lenders to lapse in 2010, many thought that payday lending would disappear. Instead, according to the Arizona Republic, many stores simply started offering car title loans instead. In February of this year, a bill was introduced to the Arizona legislature that would authorize installment loans at higher-than-normal interest, as many consumers still need a source of short term credit. North Carolina, according to BusinessWeek, just approved a bill authorizing installment loan lenders to charge more than 36 percent interest on loans up to $1,500.

Supply and demand still rule

Though there are many products that a lot of people find less than palatable, such as payday loans, there is obviously still a demand for these products. A lot of people who don’t have access to bank credit find themselves short in between paydays or have an emergency come up that they didn’t plan for. Then they have to seek out alternative financial service providers in order to get the credit they need. Because many of these lenders don’t benefit from the kind of protections banks enjoy, they have to charge higher interest rates in order to stay open. It is undeniable that there is a demand for these types of short term credit.

Sources

BusinessWeek on VA

Greeley Gazette

Arizona Republic on payday loans leaving

Arizona Republic on new loan bill

BusinessWeek on North Carolina

Beware of payday loan collection scams. / Image: ivanpw/Flickr/CC BY

Many of us in this tight economy are living from paycheck to paycheck. Payday loans can be a resource for people living close to their means when unforeseen expenses occur. Scammers, however, are preying on these already financially stressed people with threatening phone calls, trying to bully them into paying non-existent debts.

Lenders bound by laws

Legitimate payday loan companies offer small, short-term loans for people who wish to borrow against their next paycheck. However, when collection becomes an issue, these lenders are bound by laws. They are not allowed to harass their debtors, nor can they threaten arrest or jail.

Scammers in many states

In February, Maria Brown of Houston, Texas, contacted authorities reporting scammers. “They contacted me and really had me believe I was going to jail for check fraud,” Brown said. She had taken out payday loans before the calls, and the scammers seemed to have access to those applications. They sounded legitimate because of the information they possessed about her. Brown realized she was being scammed only after checking records and verifying that she had paid off her loans.

Consumeraffairs.com warns of a North Carolina caller described as “having a thick accent” who has been harassing North Carolina consumers for “a couple of years now.” The man uses abusive language and threats to frighten consumers into paying phantom debts with their credit cards. Arizona’s Attorney General’s office reported a similar scam in May. Callers claimed to be from fictitious law firms or government agencies and threatened legal action if the victims didn’t pay money owed on payday loans.

Company names to look out for

Scammers may say they represent real companies that they are not actually affiliated with, or they may use use made up company names. Illinois Attorney General Lisa Madigan reports that consumers should beware if callers say they represent Morgan & Associates, Federal Bureau of Investigators, DNR Recovery, DNI Recovery, Legal Accounts Association, Department of Law and Enforcement, Cash or ACS.

Fair Debt Collection Practices Act

According to the Fair Debt Collection Practices Act, debt collectors are not allowed to threaten arrest if you can’t pay. There is no law in the U.S. that allows arrest for unpaid loans. Collectors are also not allowed to harass, annoy or threaten any kind of violence. It is also a crime to falsely represent themselves as lawyers.

What to do if targeted

Consumers who receive these calls should never verify personal information over the telephone. Ask for written proof of the debt, which is something legitimate collectors are required to supply. Suspicious consumers may also wish to check their credit report to be sure there have been no unauthorized credit card purchases or loans taken out in their name. Report any suspicious or threatening calls to the Federal Trade Commission, the Better Business Bureau and your state Attorney General’s office.

Sources

Credit.com
Lawyers.com
Consumeraffairs.com

The state of Virginia still allows payday loans and car title loans, but there is a good deal of legislation concerning both products in the state. Photo Credit: AR McLin/Flickr.com/CC-BY

The state of Virginia has been on the front lines of regulating short term loan lenders like payday loan and car title loan companies in attempt to reduce their use. Both consumer finance products have been subject to stricter legislation that has dramatically reduced the use of such products.

Car title loan lenders operating without license in Virginia

The state of Virginia has recently released its first report about use of car title loans in the state, according to WHSV, an ABC affiliate in Harrisburg, Va. The state of Virginia passed a law that capped the interest rate and fees that could be charged by car title lenders in the state. That law took effect in October of 2010. The law also required that any businesses lending such loans get a license to operate in the state. In the last three months of that year, 25,000 loans have been lent for a total of $21 million in loan capital. There were almost 200 people whose cars were taken away because of default. According to The News Leader, a Gannet newspaper in Staunton, Va., there are 23 title lenders operating in the state but only seven are licensed.

Illegal online lending considered a problem

Consumer advocate groups like the Virginia Poverty Law Center are advising Virginians not to enter into any contracts with any unauthorized parties such as unlicensed title loan lenders and online payday loan lenders. Lending online payday loans is a felony in Virginia. Payday loan lenders themselves are authorized if the businesses are licensed and contained to a brick-and-mortar store. Laws were passed in 2008 that regulated payday loan lenders. There were more than 800 payday lenders in Virginia in 2007, according to the Washington Post. By 2010, there were fewer than 300. Legislation that would institute an interest rate cap of 36 percent has been brought before the Virginia General Assembly but never passed.

Credit carries risk

Payday loan lending and car title lending are seen by some as predatory, while others see them as simply alternative forms of credit. Any and all forms of credit carry risks. Credit cards can keep a person indebted in perpetuity, and the thousands of people who have lost their homes to foreclosure can attest to the risks of mortgage foreclosure. People who have hundreds of thousands of dollars in debt with student loans can’t discharge the debts they accrued for their education, even in bankruptcy. Laws vary by state, and borrowers should always do their homework concerning any financial product they are interested in obtaining.

Sources

WHSV

News Leader

Washington Post

Many credit unions are now offering payday loans. Image: informatique/Flickr/CC BY-SA

Credit Unions, which are generally considered more trustworthy than traditional banks, are more and more frequently offering short term loans that rival payday loans in many aspects. This change comes in response to new federal guidelines. Many analysts find this trend disturbing, while others see it as offering credit union members more options.

Many find credit unions appealing

Credit unions are cooperative financial institutions that are owned and controlled by members. By dispensing prudent loans without the profit motive of traditional banks, they are becoming more and more attractive to jaded consumers. Many say they are fed up with the hidden charges and impersonal customer service they receive from regular banks. However, when it comes to immediate short-term financial needs, credit union members have often had to to look elsewhere.

That is changing rapidly as more and more credit unions are offering low-cost, short-term loans with higher interest rates.

Federal rate cap increase

The National Credit Union Administration, in a voluntary program called Better Solutions, offers a package of services and products for participating credit unions. In September 2010, the NCUA changed its rules for short-term loans, raising the annual interest rate cap from 18 to 28 percent. Under these new guidelines, a credit union must allow borrowers at least 30 days to repay a short-term loan and not to allow more than three per customer in a six-month period.

A less predatory option?

More than 500 federally insured credit unions are offering these kinds of loans. Industry advocates say they are offering their customers alternatives to more predatory lenders on the market. “We spent a long time trying to do this in a way that would work for members and for the credit unions and not be predatory,” said Debbie Matz, chairman of the NCUA.

Detractors ascribe profit motives

Detractors, however, ascribe much less altruistic motives to the loans. Some say it is just a way to generate more revenue for an industry that suffered greatly in the financial crisis of 2008-2009.

Credit unions, which operate as nonprofit groups, aren’t allowed to raise investor capital like traditional banks can in times of trouble. According to the NCUA, about 4,600 credit unions — or about 7 percent of the industry — are at a high risk to fail.

Linda Hamilton, a consumer activist in Salt Lake City, says “they are promoting these loans as payday alternatives, but they are not really alternatives.” Hamilton, who is opposed to payday loans, sees these credit union sponsored loans as little more than the same thing.

Guidelines are voluntary

Because the new NCUA guidelines are strictly voluntary, many credit unions sell loans at higher rates than the federal program suggests. The Mountain America Federal Credit Union in Utah, for example, offers a five-day $100 loan it calls “MyInstaCash.” The loan costs $12, a 876 percent annual interest rate.

Be informed

Karen Datko of MSN Money says that these credit union payday loans aren’t necessarily good or bad. “It really pays to be an informed consumer before you apply for one,” she advises.

Sources

Paydayloan.net
Washington Post
MSN

Losing the ability to offer loans against tax refunds has caused tax preparation giant Jackson Hewitt to seek bankruptcy protection. Photo Credit: kenteegardin/Flickr/CC-BY-SA

Tax preparer Jackson Hewitt recently filed for Chapter 11 protection for a short bankruptcy. Hewitt and other tax preparation firms were dealt a heavy blow when changing regulations made it impossible for tax firms to secure funding for tax refund loans. Refund anticipation loans are often vilified alongside payday loans as preying on the poor.

Rule change sends tax preparation industry into tailspin

In 2010, a rule was changed that has severely hampered tax preparation firms, especially those that made much of their money from offering short term loans against tax refunds, or refund anticipation loans. The Internal Revenue Service informed preparers that they will no longer be able to see whether a person is receiving their entire refund, according to USA Today. That caused  funding partnerships to dry up. H&R Block dropped refund anticipation loans altogether before the 2011 tax season. Jackson-Hewitt became the largest entity offering them. Because of the IRS rule, bank regulators consider the loans too risky and therefore look dimly upon companies that still lend them, according to Reuters. Because of that, Hewitt has not been able to secure further financing on its debt and has filed for Chapter 11 protection.

Quick bankruptcy

Hewitt maintains it will be in bankruptcy protection only for a few months, in order to restructure itself and begin repaying its debts. The company got in trouble with its lenders because Hewitt relied heavily on refund loans and needed financial backing to fund the loans and got heavily in debt. However, the company intends to come out of bankruptcy and no longer rely on tax refund loans. The last major organization funding the refund loans, Republic Bank and Trust, is currently in the midst of a battle with the Federal Deposit Insurance Corporation. Republic, according to BusinessFirst, is being fined $2 million by the FDIC for continuing to fund the loans despite warnings to stop doing so. Republic maintains that because it made a record profit during the first quarter of the year while funding the loans, the loans can be lent responsibly.

Credit product disappearing

The refund anticipation loan, or RAL, is going extinct. Consumer groups liken them to payday loans; a person who has their tax returns prepared and is getting a refund is offered a portion of the funds immediately by the preparer. The refund is turned over to the preparer, with the difference being the “fee” for the lender. For instance, a person receiving a $600 refund is offered an RAL of $530 by a preparer, and the customer gets the cash within a few days rather than waiting weeks for a check from the IRS. If the return is accepted, the customer gets the RAL and the preparer gets the refund once the IRS disburses it. The FDIC objects to banks funding RALs because no credit check can effectively be performed before disbursing the loan to the customer.

Sources

USA Today

Reuters

BusinessFirst

Bank of America ranked first among U.S. commercial banks on the most recent Fortune 500 list. (Photo Credit: CC BY/MoneyBlogNewz/Flickr)

Phrases like “bank bailout” and “too big to fail” have left a sour taste in the mouths of consumers. The results are easy to see in recent consumer confidence polls, suggests Bankrate. The question “Do you trust your bank?” posed by banking consultants BAI & Finacle in their biannual Index of Bank Sentiment survey received negative replies from consumers. Not only that, but the survey shows that bankers’ assessment of consumer confidence is entirely out of whack.

The divide between consumer and banker opinion

The Index of Bank Sentiment survey polled a large group of bankers and more than 2,500 U.S. banking customers. According to the results, the gap between consumers who trust their bank (77 points on the survey scale) and bankers who believe consumers trust them (121 points) suggest a cavernous divide, rather than a mere difference of opinion. A mark of 100 points for either side would have indicated reasonable confidence.

Some financial experts believe that the rise of non-traditional consumer credit products like payday loans supports the findings of the BAI & Finacle survey. If the answer to the question “Do you trust your bank?” is no, it is not surprising that a consumer would look to other financial institutions for small loans.

Trust versus perception

Curiously, while the Index of Bank Sentiment survey indicates that most consumers didn’t trust their banks (63 percent), 64 percent of consumer respondents still indicated that their primary bank has a “good image and reputation.” Forty percent felt their bank wasn’t looking out for their best interests.

In terms of bank fees, a whopping 85 percent of consumers voiced their expectation that they should not have to pay for a checking account. Only 44 percent found current bank fees to be reasonable.

Commercial banks on the Fortune 500 list

While community banks and credit unions have become increasingly popular with consumers, large commercial banks still reign supreme when it comes to capturing consumer business. According to the recently released Fortune 500 list, 20 commercial banks cracked the list of top U.S. companies, with seven in the top 100. Bank of America Corp. ranked first among commercial banks, and ninth overall on the Fortune 500. JPMorgan Chase & Co. (13 overall), Citigroup (14), Wells Fargo (23) and Goldman Sachs Group (54) rounded out the top five.

US consumer opinion of other financial service companies

A world of financial service companies does exist beyond banks, from investment brokers to payday loan companies. Expanding upon the BAI & Finacle survey, The Edelman Trust in U.S. Financial Services Survey found that almost half of consumers polled trusted their financial service company less in 2010 than the previous year. Forty-six percent of respondents attributed the erosion of trust to corporate greed, while 20 percent felt that the financial services industry exacerbated the country’s financial meltdown.

Sources

Bankrate.com

Shared Financial Success

Author Ramit Sethi on ways banks nickel and dime you

British consumers turn to payday loans at an alarming rate. / Image: Images_of_Money/Flickr/CC BY - www.howmuchcaniborrow.org.uk

The number of payday loans has increased significantly in Great Britain over the last month. The increase continues to sharply escalate following the Bank Holiday at the beginning of the month. The demand has risen by about 58 percent from what it was in this same period last month.

Prices continue to rise

Many financial experts believe this increase in payday loans in Great Britain is a significant indicator of the direction of the country’s troubled economy. According to Moneysupermarket.com, which is a product comparison site, the weekly expenditures for a working class family in Great Britain have risen by an alarming 54 pounds (close to $87) a week over the last six-month period.

Wages stay stagnant

Working people are struggling harder than ever to stay on top of their finances as prices continue to grow and wages continue to stagnate. A report recently put out by Scottish Widows claims that about 8.5 million households would be in deep trouble financially should their primary source of income end. Only about 25 percent of people surveyed reported that they would be financially stable in the long term if their income was lost.

The Consumer Protection Report from Scottish Widows also reported that nearly half of the country’s families with children are reliant upon two salaries.

Payday loans an economic barometer

Tim Moss, who is the head of loans and debt for the Moneysupermarket.com site, says: “These products act as a barometer, giving a unique insight into the state of the nation’s finances.” Moss continues, “It’s no surprise to see the demand for payday loans rise so sharply in the current climate.”

Payday loans often cheaper than overdrafts

Moss adds, however, that despite their critics, these types of loans are often a better value than the penalties faced when entering an authorized overdraft.

Decisions should be weighed carefully

Consumers should always weigh the decision carefully before taking out a payday loan. Payday loans can be expensive if they aren’t paid back on time, and payday loan terms generally only last a few weeks.

Sources

My Finances

Payday Bank

Yorkshire Post

People thought the Consumer Financial Protection Bureau could help get rid of payday lenders, but some in the payday loan industry welcome the attention. Photo: diaper/Flickr/CC-BY-SA

When the Dodd Frank Act passed, it created a Consumer Financial Protection Bureau that will regulate consumer financial products from credit cards to payday loans. Some consumer advocates were hopeful that the CFPB was going to help to regulate payday loan firms out of existence. However, at least one major payday lender welcomes the bureau.

Advance America exec says company has nothing to hide

Consumer advocates were enthralled with the prospect of the creation of the Consumer Financial Protection Bureau because the government body could help restrain credit products that some people oppose, like payday loans. Opponents have called for the product to be regulated out of existence and the CFPB seemed a good vehicle with which to do that. However, at least one payday loan company executive welcomes the CFPB. William Webster, Chairman of Advance America Cash Advance Centers Inc. has said he welcomes federal scrutiny, according to the Wall Street Journal. He says there’s nothing that the government will dig up that the company doesn’t already disclose.

Praise for Elizabeth Warren

Webster has also gone on record praising Elizabeth Warren, according to the Huffington Post, for setting up the bureau to crack down on overdraft fees. Granted, overdraft loans and payday loans are competing products. Webster and many other loan companies have maintained for years that payday lenders disclose fees at the point of the transaction and avoid the customer abuses that the CFPB is supposed to look into. Payday loan firms have advocated for responsible legislation that works for both consumers and lenders for years, including the already enormous online lending market. Online payday lenders can skirt laws more easily than a brick-and-mortar store can, which is why Webster argues that online lenders and overdraft loan programs should face far more scrutiny than they already do.

Cloudy future for bureau

The CFPB does not have a clear future. Congress is not making it easy for the bureau to begin its work, and three recently introduced bills would change the structure of the agency or delay it from beginning operations. Any payday loan firms dreading the bureau opening its doors can rest easy, as the July 21 deadline to hire a director is a couple of months away, and given that Congress can’t decide if it should have one director or five, according to CNN, it may not start regulating anything for some time to come.

Sources

Wall Street Journal

Huffington Post

CNN

A new study purports that payday loans and crime are conclusively linked. Photo: diaper/Flickr.com/CC-BY

A newly released study links payday loans to rising crime rates and falling property values. It isn’t the first time that the two things have been connected, but the literature on payday lending has varied between a link existing and not existing. The sum total of the effects of payday lenders may be impossible to really calculate.

Social disorganization theory

A new study has re-examined the link between payday loan lenders and crime, according to WalletPop, and it claims that payday loan lenders are a cause for crime to rise. The study, originally a working paper that has been around since at least 2009, is titled “Does Fringe Banking Exacerbate Neighborhood Crime Rates?” and is written by Charis Kubrin and Gregory Squires of George Washington University and Steven Graves of California State University Northridge. The authors use social disorganization theory as a framework, which is a theory in sociology that basically says crime is influenced by environment above anything else. The contention is that payday loan lenders enter environments that are highly disorganized, such as poverty and crime-ridden areas, and cause things to get worse.

Restating the obvious

The study contends that Seattle crime rates are highest in the areas with the highest concentration of payday loan lenders and that the problem has only become worse as time goes on and the number of payday lenders increases. The study is meticulously done, and does make a case for its central premise of payday loan lenders driving up crime rates. However, Heather Luea, in a 2010 study of payday loans and crime rates, observed that this specific study (which has been around for nearly two years) noted a rise in crime of slightly more than 1 percent. It should also be noted that one of the most proximate causes of crime is poverty, and payday loan lenders cater more to people who do not totally rely on banks and credit cards for sources of credit. In other words, there is more crime in areas that are known for having more crime.

Dividing issue

There has been a long back and forth in academia concerning whether payday loans are good, bad or in a moral gray area. Accusations of bias have been made at authors of payday loan-positive and payday loan-negative studies, so it is definitely known that there isn’t a hard-and-fast academic consensus on the issue, and there are a lot of causes and correlations regarding crime. However, household income for the upper 20 percent of income earners has been increasing at a steady clip for the past 30 years but held fairly flat for the lowest 40 percent, according to U.S. Census data available on Wikipedia. That’s demographic that payday lenders cater to. Few policy suggestions are made about what to do about paying people more that aren’t met with hostility.

Sources

WalletPop

Fringe banking and crime study (PDF – Requires Adobe Reader)

2010 study by Heather Luea (PDF – Requires Adobe Reader)

Census tables on Wikipedia

The Texas legislature is considering three bills to regulate payday lending in the state. Image: Flickr / criminalintent / CC-BY-SA

In the Texas legislature, three new bills intended to limit payday lending are under consideration. One, House Bill 2592, has passed easily. Another is expected to come up for vote today and pass, and a third may or may not make it to the House floor.

Agreed upon legislation

Two of the three pieces of proposed regulation in the Texas legislature are “agreed upon” pieces of legislation. This means that the industry, consumer advocates and some legislators agreed on the legislation. House Bill 2592 passed 123 to 23 in a voice vote. This bill mandates more conspicuous disclosures of the fees and interest rates of the loans that payday lenders offer. House Bill 2594, which requires additional licensing of all storefront locations, is held up in parliamentary debate. The expectation is that HB 2594 will pass when it reaches the house. These two bills are supported by much of the industry, though one payday lending store owner who is a member of the House argued against the bills, saying they were an attempt to push out small business owners.

Controversial legislation to limit payday loans

Unlike HB 2592 and HB 2594, HB 2593 is considered controversial. HB 2593 would place specific limits on the total amount of loans that could be offered to customers. The bill would also limit the number of times a loan can “roll over.” HB 2593 is buried relatively deep in the legislative list, and unless the Texas House addresses it by midnight tonight, it will have to be moved to the Senate or re-introduced next year. The legislative session ends on May 30. Any bills passed by the House today will have to go on to the Senate, be reconciled and then sent to the Governor for his signature, veto or tacit approval.

The question of fee disclosures

The one bill that has already been passed by the Texas legislature requires extensive disclosures. One Texas legislator went undercover in several payday loan stores and reported that only one of the eight stores he visited had conspicuous displays of fees. The legislator did not indicate whether he had been given fee disclosures when receiving the loans.

Source

Texas Statesman

Is it natural to restrict consumer choice? (Photo Credit: CC BY-ND/NAME/DownSouth.us)

Payday lending has been outlawed in Arkansas since 2009, but that hasn’t stopped some consumers in need from looking to online payday loans funded from outside the state. Unfortunately, freedom of choice isn’t viewed kindly by Arkansas Attorney General Dustin McDaniel, reports the Arkansas News. McDaniel’s office obtained court orders barring two online payday lenders from issuing loans to Arkansas residents.

Arkansas has a 17 percent APR cap

Payday lending laws in Arkansas specify that interest be capped at 17 percent APR, a far from tenable rate, as numerous independent studies have shown. The online payday loans in question charged 300 percent APR, which is not out of the question in the industry, although the numbers are deceiving because the loans are not 12-month loans.

Kansas-based companies Geneva-Roth Capital and Geneva-Roth Ventures, which do business online under the banner of Loanpointsusa.com, were named in one judgment. The companies agreed to stop issuing payday loans to Arkansas residents, cancel about 700 pre-existing loans in the state, give up more than $700,000 in claims and pay the State of Arkansas $60,000 in legal fees.

The second judgment, against Kansas-based Arrowhead Investments (which also transacts as Galaxy Marketing), forced the company to stop issuing Arkansas payday loans, abandon $44,370 in claims against 162 Arkansas residents and pay the state $30,000.

All payday lenders involved were required to withdraw negative credit marks against any Arkansas borrowers.

Legislating against the people

Regarding payday loan laws in Arkansas, one might wonder why it was deemed necessary in the first place to restrict consumer choice. While they didn’t have payday loans specifically in mind, two very famous men had poignant things to say about unjust laws. Indian independence leader Mohandas Gandhi once said that “An unjust law is itself a species of violence,” while U.S. civil rights figure Martin Luther King, Jr. said that “An individual who breaks a law that conscience tells him is unjust … is in reality expressing the highest respect for the law.”

While the two men were not addressing the concept of payday loans specifically, their message is clear. Unjust laws can be injurious. The conflict exists between federal and state law, as payday loans are a legal consumer finance product on the national level. The same holds true for most states, which makes one wonder why Arkansas consumers need such protective guidance from their nanny government.

Sources

Arkansas News

Arkansas State Board of Collection Agencies

Loanpointsusa.com

Payday loan lenders are continuing to thrive despite economic conditions. Photo Credit: diaper/Flickr.com/CC-BY

Despite an increasingly hostile regulatory climate, payday lenders are finding ways to thrive. Payday loan legislation is constantly changing as states waffle on banning or allowing the credit product, but the largest firms are still doing well. Overseas expansion and increasingly diverse product offerings are helping publicly traded payday loan businesses to grow.

Largest payday loan companies expanding overseas

Payday loan lenders are often maligned as hyenas that pounce on the poor, but the characterization has not kept the largest payday lending outfits from expanding and posting profits in rougher economic times. Cash America, EZCORP and Dollar Financial Group all posted profitable first quarters for the year, according to Reuters, and have managed to keep growing despite gloom among American consumers and an already harsh regulatory climate. All three are among the largest alternative financial service firms and are publicly traded. Cash America posted a 13 percent increase in revenues, helped by international online short term loans that the company offers to customers in the U.K., Canada and Australia. Dollar Financial Group posted a 21 percent rise in revenues that came mostly from online lending, and EZCORP shares rose by 6 percent. All three are expanding overseas operations.

Regulation battles continue

The regulatory climate for payday lenders constantly changes. Numerous states constantly are trying to either loosen or tighten restrictions. For instance, the New Hampshire House of Representatives recently killed a bill that would have allowed lenders to start operating in New Hampshire, where the loans are currently prohibited, according to the New Hampshire Business Review. The California legislature is currently considering a bill to raise the borrowing cap on payday loans, according to the Silicon Valley Mercury News, amid a lot of controversy and accusations that politicians are being bribed by lobbyists. The state of Missouri, according to the Columbia Daily Tribune, recently killed a bill that would have tightened restrictions.

The future of subprime credit

Any form of credit carries risk for the borrower, including credit cards and mortgages. However, many people want to see payday loans legislated off the face of the earth. It isn’t likely to happen; forms of short term credit have existed since the beginning of civilization, and as long as there are unexpected expenses, there will be a need for something similar to payday loans.

Sources

Reuters on Cash America, Dollar Financial, and EZCORP

New Hampshire Business Review

Columbia Daily Tribune

Silicon Valley Mercury News

Just because there are new rules for how banks raise interest rates on credit cards doesn't mean Bank of America and others won't still do so. Photo: MoneyBlogNewz/Flickr.com/CC-BY

Just because there are new rules for how banks can raise credit card interest rates does not mean banks will not raise them. Bank of America, for instance, has been reported as raising interest rates to 30 percent for missing a single payment. The increased regulation is making some differences, but may not be as effective as hoped.

CARD Act causes default interest rates to increase

The Credit Card Accountability Responsibility and Disclosure Act of 2009 had a noble aim, which was to make the way credit card companies dealt with their customers and the interest rates on the cards issued to them clearer. One practice in particular was that of default rates, according to Daily Finance. When a customer defaults on their credit card, the interest rate assessed on past and future balances is raised, even if payment is late by a day. In 2009, default rates averaged around 25 percent, but are currently averaging closer to 30 percent. Bank of America is already raising default rates to 29.99 percent on the future balances of customers who are late on payments.

Card issuers have been compliant

Default rates can no longer be charged on past balances unless the account is 60 days in default or more, and banks are complying with laws. However, that is small consolation to card carriers who rely on credit cards to help them cover unexpected expenses. Credit cards are a method for people who don’t have or want to use cash to avoid having to miss payments or resort to other types of short term loans in a pinch, but a 30 percent interest rate makes for a slim margin of error. One missed payment and a car holder won’t be able to afford to rely on their card as a source of credit anymore, which is a common reason for people turning to other lending options such as car title and payday loans. The Consumer Financial Protection Bureau is supposed to begin regulating consumer credit products in a few months, according to CNN, but legislative bickering over the agency may gut it before it opens its doors.

Overdraft fees continue

People are still paying overdraft fees and buying overdraft protection despite the programs having been a cause of customer dissatisfaction, according to USA Today. It is estimated that banks and credit unions will collect nearly $38.5 billion in overdraft fee revenue for 2011. Overdraft fees average about $35 per occurrence when a customer is enrolled in overdraft protection, which not every bank customer wants to. Simply having one’s debit card declined costs nothing, and a transfer of funds from savings to checking in case of an overdraft costs far less than using a line of credit related to overdraft protection.

Sources

Daily Finance

CNN

USA Today