Samuel Gregg makes some great points in American Banker, “Bankers and Processors Are Not Moral Police.”
- how free do we allow transactions between businesses and customers to be;
- how do we hold people accountable for their free choices;
- how far we should go to protect people from self-destructive behaviors;
- what is the financial sector’s broader responsibility for the common good of a given society; and
- how far can regulators go in making financial institutions fulfill those responsibilities (whatever they happen to be)?
Take a look at this article by Lisa Servon titled THE HIGH COST, FOR THE POOR, OF USING A BANK. It’s good to see the New Yorker taking on both sides of the argument. The vibe you get is that banks are deceptive and they do not care about their customers. I can’t fault banks. They’re a business just like anyone else. They also get a lot of advantages that other business don’t. They get to borrow money at the lowest rates and they get bailed out when they bet big and fail.
I’ve been saying this for years. It’s not the people that use the check cashers and payday lenders that despise them. It’s the people that do not use the services. These people may have decent jobs and refuse the ignore that not everyone received the support they did growing up. It’s called reality. Instead of helping the underbanked, we take moral stances and make decisions for them by eliminating their options. You can fault a business for providing a service to someone, especially when they don’t have other options.
I like this quote: Joe Coleman, the president of RiteCheck, put it this way:
“Banks want one customer with a million dollars. Check cashers want a million customers with one dollar.”
The Wall Street Journal is reporting JP Morgan Chase is ending their lending relationships with what they perceive “high-risk” industries. Sources say that this period of heightened regulatory scrutiny is the reason they will scale back lending to pawn shops, payday lenders, check cashers and certain car dealerships.
(Sarcasm) Because we all know that the payday industry caused the financial meltdown that required the federal government to bail out the banks.
One such example is Cash America International, which owns CashNetUSA.com. It’s hard to say if this is the reason. “Cash America International Inc., Fort Worth, Texas, disclosed in a July securities filing that its lending relationship with J.P. Morgan had ended, but the filing didn’t explain why.”
JP Morgan Chase is also eliminating other industries like: student lending, commodities and potentially gun companies.
The CFPB is making it clear that it is going to hold payment processors responsible for it’s customers actions. The CFPB charged one of the nation’s largest payment processors, Washington-based Meracord LLC, for processing $11.5 million in illegal upfront fees from consumers on behalf of debt-relief service providers.
The collection’s companies were Payday Loan Debt Solution and American Debt Settlement Solutions. The CFPB had already obtained judgments against the two firms.
Alan Kalinsky of Ballard Spahr summed it up:
“Rather than prosecute hundreds of cases against lenders that regulators think are violating the law, they realize a lot of debt settlement companies and lenders outsource to third party providers. By going after third parties if you can get them to stop servicing what appears to be an illegal activity, that’s a very efficient way in their mind of the regulators of stopping the activity overall.”
You can read the full article titled CFPB Flexes Enforcement Muscles Against Payment Processors in the American Banker.
A must read in Time Magazine titled, Meet the New Payday Loan Customer: Middle-Class, Well-Educated.
What I found interesting about the article:
A recent study conducted by the Urban Institute found that, in 2011, 41% of American households reported using what the agency calls “alternative financial services,” according to Boston College’s Center for Retirement Research. That’s up from 36% in 2009, in the midst worst recession since the Great Depression. About a quarter of all households used an alternative financial service within the past year, F.D.I.C. data studied by the Urban Institute revealed, and about 12% had used one in the 30 days prior to the research being conducted.
About 14% of households turn to what the Urban Institute calls “nonbank credit,” a term encompassing payday lenders, pawn shops, rent-to-own contracts or tax refund anticipation loans. Roughly one in six used these services for the first time between 2009 and 2011. Nearly half said they did so just to meet basic living expenses.
About two in five people who use payday loans or who get loans from pawn shops do so because they think it’s easier or more convenient, researchers found. About half that number say they can’t get a small-dollar loan from their bank.
The most surprising increase came when the Urban Institute broke down use of products like payday loans by income. The poorest Americans, those who make $15,000 or less a year, actually scaled back their use even as wealthier people — those who conventional wisdom would assume had access to banks and credit cards — turned to alternative financial products in higher numbers. Among households with incomes between $50,000 and $75,000, the number went up by about a percentage point; for households earning over $75,000, the jump was two percentage points.
Consumer advocates believe that “payday” lenders prey on poor people. What they fail to recognize is that the industry is providing a service where the demand eclipses the supply.
What’s interesting about this settlement is that the five payday loan companies involved were located inside the state of New York. Does this mean that fines do not work with lenders outside the state?
Also, $3.2 millions among five companies is not a large portfolio.
“The five companies have agreed to pay more than $300,000 in restitution and penalties and to reverse 8,550 negative credit reports they have filed on their customers. They also have been prohibited from collecting interest on more than $3.2 million of loans.”
Read the full article at American Banker.
Don’t get me wrong…..it’s definitely good news. Until we hear from the third party processors via their banks, let’s not celebrate just yet. This sums it up:
“Institutions could be exposed to financial or legal risk should the legality of activities be challenged.”
Basically, what they’re saying is if you’re a bank or a third party processor that works with “high risk” clients, you better be able to lawyer-it- up.
The good news is that they also said…
“Facilitating payment processing for merchant customers engaged in higher-risk activities can pose risks to financial institutions; however, those that properly manage these relationships and risks are neither prohibited nor discouraged from providing payment processing services to customers operating in compliance with applicable law.”
You can read the full letter at on the FDIC website here.
What’s unknown here is how these types of rulings affect the primary creditor. Back in July, I wrote about Fair Debt Collections Act titled: Fair Debt Collection Practices Act And The Primary Creditor. There is a huge grey area as this pertains to the primary creditor.
In a settlement announced Monday, the FTC brought its first-ever debt collection case related to unlawful text messages, signaling that the mobile form of communication is becoming a new channel for businesses with a track record of predatory practices. The suit was settled with National Attorney Services, who upon hearing about the charges proactively worked with the FTC to remedy the the violations.
Here is an example of what was being sent out:
“It is URGENT for you to call National Attorney Service regarding a very sensitive matter,” the messages read. Along with the texts came threatening phone calls from people claiming to be law firm employees. They hinted at potential lawsuits, arrest and even “imprisonment” if consumers didn’t pay their debts.
The FTC is policing this activity through it’s website. Consumers can file complaints here.
You can read the full article at the Huffington Post titled:Debt Collectors Using Terrible New Tactic Get Fined $1 Million.
In the next two weeks, the FDIC is going to issue a letter explaining how how banks should do business under U.S. rules with online lenders who may run afoul of state laws. The FDIC promise comes in the wake of demands from Republicans in the U.S. Congress to explain why it has pressured banks to cut ties with the online lenders. Credit this to Blaine Luetkemeyer, a Missouri Republican, who had pressed the FDIC in writing and in person to explain its stance. We can also thank the Online Lenders Alliance and Lisa McGreevy. OLA has been pressing from the start.
The letter should be made available within two weeks, but will it solve anything? The letter from Gruenberg does not explicitly state whether the FDIC regards online lenders who do not comply with individual state laws to be illegal operations. If it’s vague and says just watch who you do business with, we’re in trouble. This will scare off 99% of the banks, which is currently the state we’re in. The last month has been a mess for online lenders trying to collect money through ACH and merchant processing.
So far, the FDIC is playing dirty and intimidating small banks. For example, one bank told a lender the FDIC had refused to close out its current audit of the bank until it ended the processing work. Another bank that was considering an online lender as a client faced a threat of an unplanned audit, according to the document. If banks get scrutinized for working with Online Lenders, they just won’t do it.
I’ve heard rumors of six digit fines for banks over a single infraction. Some third party processors are blocking ABA routing numbers in states where payday loans are prohibited. This has been a disaster because the large banks are national. An Illinois borrower can be using a North Carolina bank routing number.
Let’s hope “Reasonable Measures” are reasonable.
Read more at Bloomberg: Online-Lending Rules Clarification Promised by FDIC’s Gruenberg.
This California Senate bill 318 is creating rules for loans between $300-$2,500. I glanced at the bill and it is textbook terrible. Here are the low lights. Beyond the price control here, it’s poorly planned. The compliance will stink on this one.
- 36% interest rate cap (essentially).
- Can only refinance once.
- Can only refinance after a 60% paydown and borrower is current.
- Can charge a 7% administration fee or $90, whichever is less. Lesser of 6 % after that or $75 administrative fee on next loan. Can only charge every four months.
- You have to offer them financial counseling when they refi.
- Gross monthly income requirements.
My estimation puts this at a 50%-100% APR. If you lose more than 5% of the loans, you’re probably in the red.