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

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

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

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

Tax preparer H&R Block still has not fully recovered from the loss of refund anticipation loans. Photo Credit: socialwoodlands/Flickr.com/CC-BY

Tax preparation giant H&R Block has just filed for another quarterly loss, despite it being the busiest quarter of the year. Though tax return season is when tax preparers make the bulk of their income, the loss of the refund anticipation loan product has cost Block dearly. The loan against tax refunds is facing extinction as a product.

Number of preparations increase but fail to keep Block in the black

H&R Block, the largest tax preparation service in the nation, has just released a quarterly earnings report, but there is little in the way of good news in it. In the recent report from Block, according to the Wall Street Journal, the company disclosed that the number of tax returns it had prepared in the previous year had increased by 5.7 percent in the period ending March 31. The company also reported that retail preparations had increased by 2.6 percent during March, but preparation fees had declined by 2.2 percent. Block expects to report more significant earnings after the month of April. However, the tax preparer has been hobbled by the loss of the popular refund anticipation loan product when its financing partner, HSBC bank, was forced to stop funding the loans with block.

Refund anticipation loan going extinct

Refund anticipation loans are popular for people short of cash around tax time, and also for tax preparation services because the loans are profitable. A person has their taxes prepared by a service, such as H&R Block or Jackson-Hewitt. The preparer offers them a loan against their tax refund, which is signed over to the preparer. The borrower gets a check for the amount of their refund, less a fee for the lender. It’s technically a short term loan, as it’s repaid very soon. The product is demonized as being similar to payday loans, though there will be few firms still offering the loans soon enough. The IRS can no longer report on the amount or status of a persons’ income tax return to certain types of loan lenders, which disqualifies most banks from meeting FDIC underwriting requirements for funding RALs for tax preparation services. At the end of this tax season, Republic Bank and Trust, a small bank in Louisville, Kent., will be the only bank in the nation providing funding for RALs, according to the Washington Post.

IRS urges electronic filing

The Internal Revenue Service has long advocated that people in a rush electronically file rather than resort to any loans against their tax refunds. Direct deposit can have tax refund money in a persons’ bank account in two weeks or less, but for those that really are counting on a return are not at a loss for finding out where their return is, according to Reuters. Simply head to the Where’s My Refund? section on the IRS Website, and enter the appropriate information. Do not go to any website other than the IRS site to track your refund, as it is likely a scam.

Sources

Wall Street Journal

Washington Post

Reuters

IRS Where’s My Refund?

Federal Reserve Vice Chair Janet Yellen has confirmed the Federal Reserve isn't going to tighten the credit supply just yet. Image from Wikimedia Commons.

The Federal Reserve has announced that it won’t be tightening the national credit supply just yet. The Federal Reserve has certain controls over the amount of available lending capital in the financial system. Fears of inflation have caused some to think the credit supply needs to be tightened, but the Fed does not think that is currently prudent.

Fed says economy is too shaky to tighten credit

Prices of consumer goods, such as food and gasoline, have begun rising recently, causing many to worry about economic inflation. This has prompted lawmakers and finance industry insiders to question whether the Federal Reserve, the key institution in setting monetary policy and controlling things like inflation, should start restricting the available credit supply. Members of the Fed, however, are convinced that the overall economy is too shaky to tighten the credit supply, according to MSNBC. At a recent speaking engagement at Yale University, Fed Vice Chair Janet Yellen said that conditions weren’t right, but the central bank would be easing off its current policy of keeping interest rates at near zero.

Unemployment too high

The Fed partially controls the supply of available credit funding for the banking system of the United States and influences the interest rates that banks charge. During a recessionary period, the Fed can lend short term loans to banks at zero or close to zero percent interest to stimulate lending. Those banks can lend that capital to consumers, as mortgages or personal loans, or to other financial institutions. There are, of course, many other facets to the Federal Reserve’s operations, but credit supply is a key function. Alternately, the Fed can cut back on the amount of available capital if it thinks price inflation is making the nation’s currency worth less than it should be. The price of commodities like oil and food is increasing, which means that $1 doesn’t go as far.

Banks also have CFPB to worry about

The Federal Reserve is going to eventually restrict the supply of credit, meaning interest rates on loans will start increasing in the next year or so, once the central bank feels confident enough about unemployment and other economic conditions. Banks will also have to follow rules from the new Consumer Financial Protection Bureau, which will levy fines for legal violations. The bureau will start operating in July, and spokesperson Elizabeth Warren has promised the first new regulations set in place by the bureau by January of 2012, according to Reuters. The CFPB is still a hotly debated issue in Congress, so the extent of its reach has yet to be determined, but a greater degree of regulation is soon to set in for the financial system.

Sources

MSNBC

CNBC

Reuters

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

The Consumer Financial Protection Bureau is due to start operating in July, but cannot seem to get past Congressional hearings and legal infighting. Image from Wikimedia Commons.

Congressional lawmakers continue to fight over the creation of the Consumer Financial Protection Bureau. The CFPB, which is intended to have regulatory jurisdiction over consumer finance, is supposed to start operations in July. So far, the rules over what it is allowed to do have not been established and it has no director.

Republicans trying to gut bureau before it starts operating

The Consumer Financial Protection Bureau, which holds regulatory sway over consumer credit like mortgages, credit cards and payday loans, is supposed to begin operations on July 21. However, Congressional Republicans are trying to dilute the regulatory powers that the CFPB is supposed to have once it begins operating, according to CNN. After a recent hearing in the nation’s capital, bills were introduced in the House of Representatives to change certain rules in how the federal agency will operate. Among proposed changes are to install a five member committee instead of a single director, easier Congressional override of any CFPB action, and to keep the CFPB from conducting any operations until a director has been appointed by the Senate.

Major objections to lack of oversight

Under the current rules, the CFPB would be an independent agency that would be funded by regulatory fees that banks pay to the Federal Reserve, according to MarketWatch. However, the formation of the organization has been repeatedly held up in Congress for a number of reasons. The most oft-repeated objections about the CFPB are that too much power would be placed in the hands of the director, and that Congress didn’t appoint Elizabeth Warren to set it up. Warren is not the head of the CFPB, but a special adviser that was handpicked by the President. However, the Treasury Secretary and Chairman of the Senate Banking Committee both announced their opposition to further restricting the bureau recent Congressional hearings, according to Bloomberg. Cynics could assume that the mere existence of another federal regulatory body is at least part of the objection.

Small banks against further regulation

A concern of small banks, community banks and credit unions has been that the new bureau could make it nearly impossible to keep the doors open, according to Reuters. Small banks have higher overhead and lower profit margins than their megalithic cousins. Bank of America and Wells Fargo are able to afford to pay fines easily, but community owned banking entities have a much more difficult time. Small banks depend on sources of revenue such as account fees and interest on short term loans just as much as large banks do, and higher costs of compliance will make operation more difficult for them. Not everyone wants to bank with corporate Goliaths.

Sources

CNN

MarketWatch

Bloomberg

Reuters

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?

Tax refund anticipation loans from tax preparation services may become a thing of the past. Image from Wikimedia Commons.

Refund anticipation loans are one of many loan products coming under an increased amount of scrutiny. Federal regulators are making it more difficult for banks to finance the loans and therefore harder for businesses to lend RALs and similar credit products to customers. The loans are wildly unpopular with consumer advocates, who insist they are detrimental to consumers.

Tax preparers running out of options for financing

Tax preparation services such as H&R Block and Jackson Hewitt are finding it harder to find financing for tax refund loan programs, as federal regulations make it more difficult for financial institutions to meet legal underwriting requirements. H&R Block was forced to close its refund anticipation loan program when its partner in financing the program, HSBC, was forced to withdraw from the partnership in the program by the Office of the Comptroller of the Currency, according to the Washington Post. H&R Block posted a net loss of more than $12 million in the three-month period that ended Jan. 31, and that partially was due to the loss of the product, according to NPR. JP Morgan Chase stopped financing the short term loans against tax refunds in April of 2010.

Change in IRS rule brings loan product to a halt

The Achilles heel to refund anticipation loans was an Internal Revenue Service rule that allowed tax preparers and creditors lending RALs to check on the status of a person’s tax refund if the person had taken out an RAL from that preparer. That law was repealed last year, and the fact that a bank could not check on the borrower’s credit worthiness meant that legally mandated underwriting requirements cannot be met. Only the River City Bank and Republic Bank and Trust banks in Louisville, Ky., and Ohio Valley Bank in Gallipolis, Ohio, were left financing RALs this year. River City Bank and Ohio Valley Bank are leaving the market at the end of tax season, leaving only one bank financing refund anticipation loans in the entire nation, at least for large tax preparers.

Refund anticipation loan basics

Refund anticipation loans are fairly simple. People get their taxes prepared by a preparation service like H&R Block or Jackson-Hewitt. If they are due an income tax refund, they can take out loans against their refunds. The loan is the amount of the refund minus a fee, usually about $65. The loans are somewhat similar to payday loans, as the loan is against future earnings. Just like payday loans, there is no credit check involved, but the loan comes with fees and has stiff penalties for the borrower in case of default. The loans are most prevalent in low-income communities and have been frequent targets of criticism from consumer advocacy groups. However, most people who take the loans have a pressing need for cash and don’t want to wait.

Sources

NPR

Washington Post

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)

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 long-awaited release of discount window data by the Federal Reserve illustrates the global impact of Wall Street bank failures. Image: CC laura padgett/Flickr

To prevent going belly-up during the financial crisis, anonymous banks lined up at the Federal Reserve’s discount window for cheap loans. Last week the Supreme Court ruled in favor of a Freedom of Information Act request that the Fed had to reveal which banks borrowed from the discount window and how much was loaned. Data unveiled by the Fed Thursday shed light on how Wall Street’s meltdown spread damage around the globe.

Fed bails out the world’s banks

The discount window was created by the Fed a century ago to help healthy banks caught in a cash crunch with short-term loans. Due to the stigma in financial circles associated having to stand before the Fed with hat in hand, the identities of the borrowers have always been kept secret. But the Fed was forced to make the data public by the Supreme Court after it ruled in favor of a Freedom of Information Act request filed by Bloomberg and Fox Business. When the Fed finally released the data Thursday, any concern about a negative stigma may have been alleviated by the fact that just about every bank in the world had to stand in line at the discount window as the global financial system teetered on the brink of collapse. More than 25,000 pages of documents show the Fed lent as much as $110 billion through the discount window in one day as the financial crisis peaked.

Surprise! European banks were biggest borrowers

Wall Street banks have taken most of the flak for government bailouts during the financial crisis. But data released by the Fed revealed that European banks were among the biggest borrowers at the discount window. On Oct. 29, 2008, Belgian-French bank Dexia borrowed $26.5 billion and Dublin-based bank Depfa, owned by German mortgage lender Hypo Real Estate, borrowed $24.6 billion. The discount window also made multi-billion-dollar loans to other European banks including Austria’s Erste Group, Bank of Scotland and France’s Societe Generale. On this side of the pond, before it became the biggest bank failure in history, Washington Mutual borrowed $2 billion on Thursday, Sept. 18, 2008, to get through the weekend. When that loan was due Monday, Wamu took a $2 billion overnight loan and kept taking another $2 billion every night until it was taken over by J.P. Morgan Chase on Thursday, Sept. 25, 2008.

Data shows global extent of financial crisis

When the collapse of Lehman Brothers in September 2008 triggered the financial crisis, the global economy went into a tailspin, the financial system froze and banks around the world begged the Fed for help. The release of the discount window data shows just how bad the damage was and how quickly it spread. During testimony to a congressional panel investigating the financial crisis in November 2009, Fed chairman Ben Bernanke said of all the banks lined up at the discount window, only one was not at risk of total collapse. The Dodd-Frank financial reform bill passed in 2010 removes confidentiality from discount window lending, but not until two years have passed from the time the loans are made — about the same period it took the courts to force the Fed to do it this time.

Sources

Fox Business

Wall Street Journal

Reuters

Wells Fargo and other banks are ending debit rewards programs as financial reform efforts are eating into their bottom line. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

The costs of financial reform are adding up as a potential curb on interchange fees is causing banks to cancel debit card reward programs. Financial reform legislation has caused ripple effects, and the effort to legislate fairer conditions for consumers is leading to more restrictive conditions for consumers. Lawmakers are beginning to balk at the high cost of such laws.

Interchange fee cap may deprive consumers in effort to protect them

The proposed cap on interchange fees or “swipe fees,” which merchants must pay banks to complete debit card transactions, has already led to major banks trying to save money any way possible. Free checking programs and debit card rewards have landed on the chopping block. JP Morgan Chase ended its debit card rewards program and more are following suit, according to CNN. Wells Fargo subsidiary Wachovia has stopped offering debit rewards to new customers, and Wells Fargo will do likewise on April 15. Citibank recently disclosed that the bank is “in the process of evaluating potential changes,” which means it is likely going to cut debit rewards programs for customers as well.

Costs of financial reform adding up

A recent estimate by the Government Accountability Office placed a price tag of $1 billion per year on the Dodd Frank Act, or the financial reform bill, according to USA Today. The creation of a totally new agency, the Consumer Financial Protection Bureau, has already caused controversy and infighting among lawmakers. The GAO estimated that federal agencies would need to hire more than 2,000 people to enforce the laws, including any the CFPB would be enforcing. Congressional Republicans have been openly critical of the agency, which some assert has too much authority. The special adviser to the president in charge of setting up the agency, Elizabeth Warren, has defended the agency, saying that the “Wall Street behemoths” that created the need for the agency should be targets, not the CFPB, according to Bloomberg. The agency will have oversight of consumer financial products from personal loans to credit cards, when it starts operations later this year.

Consumers may end up not using credit at all

The aim of financial reform laws is to prohibit trickery by financial institutions and make the use of credit safer for consumers. That is a noble aim, but it seems to be having a chilling effect on financial institutions. Debit card rewards and free checking are falling by the wayside, but banks cannot impose fees with impunity. Loan credit is likely to get tighter, though that also means banks and lenders cannot gouge customers out of the blue. However, the debate is going to be whether the loss of convenience is worth it.

Sources

CNN

USA Today

Bloomberg

New homes sales and new home construction have dropped to a new low during February. Image from Wikimedia Commons.

Demand for newly constructed homes and new home sales have been put on ice during the past few months of bitter cold. Sales of new homes dropped nearly 17 percent during February, and the housing industry continues to experience record low levels of activity. The drop in sales has been partially accredited to skittish lending conditions.

Home construction brought to a crawl

The construction and sale of new homes has slowed considerably during the past few months, which has been attributed partially to cold weather, a glut of foreclosure properties on the market and dwindling demand, according to Reuters.

New housing starts, or new housing being built, decreased by 27 percent during the month of February. New home sales from the end of January to the end of February declined by 16.9 percent, and the seasonally adjusted annual rate of sales slowed to 250,000 from 300,000. New home sales have decreased by 28 percent since February of 2010, according to that year’s data.

Winter conditions likely were a factor in delaying construction, but weak demand is certainly a factor as existing home sales fell too. However, it may equally be the case that banks are unwilling to write huge installment loans for homes few are willing to buy.

Head real estate economist blasts sluggish lending

Lawrence Yun, the chief economist for the National Association of Realtors, blasted skittish lenders and “unnecessarily tight credit” at a recent press conference, asserting that there would be greater numbers of sales if “mortgage credit conditions would return to normal,” according to the NAR website.

Ron Phipps, president of the NAR, echoed Yun by saying that though interest rates for mortgages were certainly lower than many short term loans, lamenting that “credit remains a challenge.” However, it is difficult to justify paying for a new home when prices for existing homes are low. At the end of February, the median price of existing homes reached $156,100 compared to new homes, which have a median price of $202,100 for new homes.

Glut of foreclosures

The housing market is currently riddled with foreclosed properties, and the rich are having a field day gobbling them up. Cash sales made up 33 percent of all home sales in February, and 39 percent of all homes sold were distressed properties, according to Bloomberg.

Federal Reserve Chairman Ben Bernanke has also been pessimistic about housing, being quoted recently as saying that mortgages were “difficult to obtain” and that “there’s no demand for construction,” in a recent appearance before Congress.

Housing data has been indicating that for the lucky few who have the cash or the credit, a great bargain can be had. However, those that are trying to become homeowners will likely have a difficult time. The housing industry as a whole will likely continue to struggle until demand and the supply of credit begin to perk back up.

Sources

Reuters

Bloomberg

National Association of Realtors

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

When it comes to ATM fees, JP Morgan Chase is setting the bar higher. (Photo Credit: CC BY-SA/Thomas Belknap/Flickr)

ATM fees are an unfortunate fact of life for out-of-network banking customers. Now ATM fees are on the rise, as banks look to recapture the overdraft fee money lost to the Dodd-Frank Wall Street Reform Act. According to the Huffington Post, all JP Morgan Chase customers could face $5 ATM fees very soon.

Chase ATM fee in Texas, Illinois

Banking giant JP Morgan Chase has begun charging non-customers in Illinois $5 to use a company ATM. In Texas, it’s $4. If Chase’s ATM fee increases produce enough revenue, the company has told the Wall Street Journal that the increases will go global, sending even more customers in search of short term loans because they’ve been charged an exorbitant amount to access their own funds.

According to Bankrate.com senior financial analyst Greg McBride, Chase’s $5 ATM fee is just the latest in a wave of changes sweeping the banking industry. As banks expect to lose billions of dollars in revenue once Dodd-Frank provisions involving overdraft and other fees fall into place, the “too big to fail” financial monoliths are passing the inconvenience on to customers.

“The reality is that bank revenue is being squeezed by regulatory changes and the banks are going to be accounting for that in other areas,” said McBride.

Maintaining ATM networks is another expense cited by banks, as building and maintenance aren’t cheap. However, a Wall Street Journal study found that most of the 425,000 ATMs in the U.S. aren’t even owned by banks.

What’s going on behind the curtain

Consumer advocates believe that big banks are making noise about allegedly being forced to charge non-customers $5 at the ATM in order to drum up sentiment against the Dodd-Frank act, and consumer-oriented financial reforms in general. A lawmaker may hear this and be swayed. A consumer, on the other hand, may be too busy tracking down a short term loan to make up for the higher ATM fees to care about a bank’s problems.

The reality of the matter, according to consulting firm Oliver Wyman, is that banks generated $7.1 billion in total revenue from ATM fees in 2010. Of that chunk, $3 billion came specifically from banks charging their own customers for using another bank’s ATM, reports the Wall Street Journal. Non-customer ATM fees may only have accounted for 1 to 2 percent of total pre-tax operating profit for banks, but that’s still billions of dollars that the banks are scrambling to replace.

More customer restrictions

Chase’s $5 ATM fee is yet another prohibitive mark against the bank in the span of a week, as it is also considering a $50 cap on debit card transactions. Still, low to no monthly fee ATM and debit cards are a selling point for banks. Higher ATM fees are hidden in the fine print.

“It’s easy to compare debit cards by looking at the monthly fee, so banks are going to try to minimize the monthly fees and load you with (ATM transaction) fees,” said CardHub.com CEO Odysseas Papadimitriou.

Sources

The Atlantic

Huffington Post

Wall Street Journal

Don’t forget the high-to-low processing

Congress is taking aim at Elizabeth Warren and the Consumer Financial Protection Bureau. Photo Credit: David Shankbone/Flickr.com/CC-BY

Members of Congress are exploring options to cut back on the regulatory powers of the Consumer Financial Protection Bureau. Some feel the agency that will regulate everything from mortgages to payday loans has too much power. However, the head of the agency insists that greater protection is needed.

Elizabeth Warren faces off against Republican-packed House

A recent hearing of the House Financial Services Committee turned into a sparring match between members of Congress and Elizabeth Warren, head of the Consumer Financial Protection Bureau, according to USA Today. The CFPB was created by legislation last year, but it will not begin operating until July. Warren was unfazed during the hearing, asserting that if a similar agency had been in place years ago, irregularities in the mortgage industry would have been noticed and dealt with sooner. The agency, part of the Federal Reserve, is intended to ensure greater transparency and fairness in consumer finance products including mortgages, credit cards, installment loans, check cashing and payday loans.

Reach of new agency too pervasive, say Republicans

Congressional Republicans have objected to the laws that created the bureau, contending that the agency is granted too much authority with too little oversight. Members of the House Financial Services Committee also objected to the CFPB having too much discretion because it could technically pick and choose which regulations and sanctions it could impose, though Elizabeth Warren countered that the Federal Reserve has the power to override any decision that the CFPB makes. House Republicans also object to Warren’s involvement, according to CNN, as the agency does not have a director. The director of the agency has to be appointed by the Senate, and Warren is technically only an adviser to the President and the Treasury. Dr. Warren is a professor at Harvard Law School and an expert on consumer advocacy law.

Treasury points out lack of power

Congressional Republicans had previously been critical of the agency for participating in recent foreclosure reform efforts related to the “robo-signing” scandals. Treasury Secretary Timothy Geithner was quick to inform Congress that the CFPB is not operational yet and had no consequential involvement in resolving any disputes in foreclosure procedures, according to Bloomberg. Secretary Geithner advised Congress that any functions of the agency until July 21 are in an advisory capacity only. On July 21, the agency could indeed become a powerful force. The CFPB could change the nature of consumer finance. For instance, the CFPB could decide to cap interest rates on short term loans, which could send payday lenders out of business and grant credit card companies a virtual monopoly on small-scale consumer credit.

Sources

USA Today

CNN

Bloomberg