This article is out of Colorado, but it touches on the legislative battles payday loans are taking on in different part of the country and at the Federal level.
A good read if you do business in multiple states. The article is titles: “Payday lenders prep to battle reform in Colorado“
If you think that bank overdraft fees are a necessary evil, you should be able to understand the need for payday loans.
Both products carry similar APRs, but different stigmas. Overdraft fees have no disclosure and the bank customer has absolutely no say. Payday loans, on the other hand, are a very straight forward and easy to understand product. With a payday loan, rollovers can extend the loan to about 8 weeks, if it’s not paid in full.
If you give a choice to borrowers between overdraft protection and a payday loan. I bet most people choose a payday loan. If anyone can think of a reason, not to, let me know.
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Banks run lots of fancy commercials that contributes to their image, but when it comes to working their system, they’re near the top.
This USA Today article titled Anger at bank overdraft fees gets hotter, bigger and louder is all over the Internet. What I think is remarkable are the 893 comments that have been posted. You don’t have to read long, before you run into this one:
“I am disgusted with BofA. Just recently I knowingly used my debit card for a transaction that would overdraw my account, because I believed that the transaction was worth the $35 overdraft fee. It was $115 charge at a pharmacy for liquid Tamiflu. My 8 yr old daughter had a raging fever, and had tested positive for H1N1. What choice did I have?? I didn’t. Little did I know, that BoFA handles transactions from highest to lowest. So, the $115 was taken out first & then the previous 7 very small transactions from earlier in the week. Sadly, I had cash ($789) at home to well cover the expenses, but with the urgent trip to the doctor, missing work, etc, I just didn’t have time to get it to the bank. I did manage to get it to bank 3 days later when my daughter’s fever finally broke. Well, then I have bills hitting my account, water, phone, electricity. This activity turned me over. So, my trip to the pharmacy turned out to be $595 in late fees all within a matter of 7 days. Now, would I make that same decision to make that transaction at the pharmacy that day, yes. Will I continue to bank with BofA. No. I even went to the branch to dispute some of the fees, and the customer rep couldn’t make sense of some of the fees.”
You wonder if banks can make money if overdraft fees are taken away? Wouldn’t that be a a dirty little secret?
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Assembly Speaker Mike Sheridan, in Wisconsin, went on the record to oppose the recent bill to cap payday loans at 36%.
In a pre-fall session recent interview on WisconsinEye, Sheridan also took a controversial position — no! – on the bill of fellow Democratic Rep. Gordon Hintz, of Oshkosh, that would clamp a 36 percent interest rate on payday loans. In remarks that surprised Hintz, Sheridan said the Hintz bill goes “too far.”
It was a public signal to Hintz that he better start looking at other ways to regulate the $700-million-a-year payday loan industry. Although it was the kind of signal that Assembly speakers have given for decades, it was unusually blunt talk from the new speaker.
The Payday Loan Industry Blog writes:
“South Carolina has turned down an appeal protesting its previous decision to award a contract to Veritec Solutions for the establishment of an online database system for tracking payday loans applied for by residents of South Carolina.”
We’ve, personally, worked with Veritec. They’re pretty good to work with. What I don’t get is all this Big Brother stuff that the states are doing. For example, in Illinois, they’re adding title loans to the state database. All I can say is that things are going in the wrong direction.
Arkansas ran the last of its payday lenders out this past year. Now they’re setting their eyes on Internet lenders. Their district attorney has sent out over 30 warning letters to Internet lenders.
It will be interesting to see how this plays out. I’m sure many of these lenders are off shore companies or Indian reservations. These lenders thought they were immune to local laws, but recentl, a British Internet lender paid $1M in fines to the FTC and state of Nevada.
Today, they’re just telling Arkanasas borrowers to close their bank accounts and sending a letter to the lender to cancel the loan.
The big question is what can they do about it? Are offshore Internet lenders immune from state law enforcement? I guess we’ll see.
Here’s what the Deputy Attorney General of Arkansas had to say: “Sometimes you try to trace them and they end up being in the Philippines or Botswana or somewhere like that, to the extent that you can even figure out where they are,”
It looks like payday lending is going the way of Internet gambling. Internet gambling’s major blow was a federal law named the “Safe Port Act“. This made it illegal for financial instiutions to transfer funds to an Internet lending site.
You can read the story in full here.
Check out Payday Pundit for all the breaking news on Wisconsin’s battle.
Critics of payday lending make the mistake of not looking at the big picture when it comes to credit. Instead of looking at the lending ecosystem, they get caught up in sensationalizing the APRs.
The cost of credit has to do w/ the credit worthiness of the individual and the to some degree the amount being borrowed and the term of the loan.
The biggest mistake they make is not understanding what lending options exist out there. Let’s see what the cheapest forms of credit are, up to the most expensive. We’ll order them from least expensive to most expensive and let’s just stick to unsecured.
Here’s the point, all these products are connected. They make up the unsecured credit ecosystem. If you get rid of one, it will affect the other. It’s not the product that’s good or bad, rather it’s how you use that product. This is also known as personal responsibility.
Capping rates or commoditization of the payday product is the worst thing legislators can do. This just makes things less competitive in the long run and leaves borrowers worse off.
Most people’s solution to the payday loan issue is that each person has an idea of what is “fair”. At the end of the day, fair or foul does not matter. I can’t say it better than Ayn Rand does in Atlas Shrugged, “In a capitalist society, all human relationships are voluntary. Men are free to cooperate or not, to deal with one another or not, as their own individual judgments, convictions and interests dictate.”
Please feel free to suggest any improvements to this post. It’s definitely a work in progress.
We discussed this story back in February. The FTC and state of Nevada were all over a few internet lenders titled “Nevada Internet Lenders Under Fire“. A few days ago, they settled for a cool $1 million. The split was around $30k to the state of Nevada and $970k to the FTC. I guess the FTC is ordering sushi this week.
The Internet payday lenders were accused of violating multiple TILA (Truty in Lending Act) rules, in addition to Nevada’s Deceptive Trade Practices Act.
The lenders are: “Cash Today, Ltd., and The Heathmill Village, Ltd. (both registered in the United Kingdom); The Harris Holdings, Ltd. (registered in Guernsey, an island between England and France); Leads Global, Inc., Waterfront Investments, Inc., ACH Cash, Inc., HBS Services, Inc., Rovinge International, Inc.; and Lotus Leads, Inc., and First4Leads, Inc. (both now dissolved); each doing business as Cash Today, Route 66 Funding, Global Financial Services International, Ltd., Interim Cash, Ltd., and Big-Int, Ltd. The settling individual defendants are Aaron Gershfield and Ivor Gershfield. A separate settlement has been reached with Jim Harris, who managed the Nevada side of the operation.”
Here’s what the Internet lenders need to start doing, in addition to “cough, cough” pony up a $1M.
“The order bars the defendants from violating the Truth in Lending Act and Regulation Z in extending closed-end credit by requiring defendants to make the TILA disclosures mandated by law, and by failing in any other manner to comply with TILA and Regulation Z. The order also requires the defendants to disclose clearly, in writing, in a form consumers can keep and before a transaction is made, the interest rate and other key terms of their loans; a repayment schedule showing dates when consumers’ bank accounts will be debited for the loans; payments and fees for late or non-payment of the loans; and a statement that payday loans may be limited or prohibited in some states. The defendants must obtain consumers’ written confirmation that consumers have received the required disclosures before making a transaction and, when collecting debts, the defendants must provide consumers, upon request, a written statement of amounts and fees paid and due.
In addition, the order prohibits the defendants from violating Nevada state consumer protection law when conducting business from the State of Nevada or when selling goods or services to Nevada residents, including failing to be properly licensed, failing to provide notice and disclosure of all material facts as state law requires, and failing to comply with any state or federal law in selling goods or services. The order also contains recordkeeping and reporting provisions to allow the FTC to monitor compliance.”
So what does this all mean? Being off shore is no longer a safe alternative.
You can read this article in its entirety at Mesquite Local News.
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There is a hearing scheduled this week for the remaining 835 lenders. Since the state capped interest rates at 28%, lenders began to operate under an alternative law.
Since this law, almost 50% of lenders in Ohio have stopped giving loans.
You can read more in the Dayton Daily News.