More Bad News For Third Party Payment Processors

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.

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Payday Loan Article in Time Magazine (Must Read)

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.

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NY Attorney General Settles With 5 Payday Lenders

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.

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Big News From the FDIC and ACH Processing….I’m Cautiously Optimistic.

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.

 

 

 

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Debt Collection Industry Under Attack From the FTC

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.

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Online Lenders…Still Holding Our Breath

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.

 

 

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California Alternative Payday Loan SB 318

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.

 

 

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Payment Group Says U.S. Banks Can Work With Legal Online Lenders

This is good news, but is it the reality?  Bloomberg writes: Payment Group Says U.S. Banks Can Work With Legal Online Lenders.

I’m sure if you’re processing through Bank of America and you’re Cash Net USA it is, but most lenders can not get an account with a major bank.  They’re stuck going through 3rd party processors.  The stakes are so high for the participating banks, why would they put their charter in harms way over a perfectly legal, online lender processing a couple of thousand dollars worth of payment a day?

This situation stinks and it’s creating a huge domino effect.  In the process of going after off shore and tribal lenders, Benjamin Lawsky and the New York Department of Financial Services has intimidated banks into not doing business with any type of online consumer lender, licensed or not.  How do these 3rd party processors fight back when they’re getting singled out?

You would think there are enough crooks on Wall Street for these people to chase.  Here’s some advice, find the next Bernie Madoff and stop preaching from your soap box.  We get it, you want to by Mayor of New York in ten years and this is a cheap and easy way to get your name in the papers.

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ACH Processors Dropping Like Flies

“The man who passes the sentence should swing the sword. If you would take a man’s life, you owe it to him to look into his eyes and hear his final words. And if you cannot bear to do that, then perhaps the man does not deserve to die.”
― George R.R. MartinA Game of Thrones

Bad days for online lenders.  What we never anticipated was the collateral damage caused by New York regulator Lawsky.  You would think that being licensed and operating legally inside your state, would protect you.  It doesn’t.

It seems that all the banks that processed for offshore and tribal lenders were subpoenaed.  If you work with these processors that clear through the subpoenaed banks, you’re in the line of fire.  You’ll be lucky if you get 30 days.

The industry has made a call to arms.  OLA is fighting diligently and using every resource available to them to clear this up.  The FDIC has taken a “shoot first ask questions later” approach to this situation and we’re all shocked.

 

 

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Cordray Admits CFPB Can Only Enforce Federal Law

“A bruise is a lesson…and each lesson makes us better.”
― George R.R. MartinA Game of Thrones

Ironically, after years of worrying about the CFPB, it was the New York Department of Financial Services that drew first blood.  In a WSJ article titled CFPB Head: Limited Control Over Online Lending Richard Cordray states “State authorities enforce state law, we enforce federal law”.

Does this mean that the CFPB will not come after online lenders?  Of course not.  There are plenty of vague federal laws out there.  If someone looks hard enough, they’ll find one.

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