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If you’re interested in Tribal lending, you have to read Hilary B. Miller’s article titled:  The Future of Tribal Lending Under the Consumer Financial Protection Bureau.

My take is that the CFPB would not initially go after the Indian tribes.  Rather through discovery of the Tribal Lending Entity (TLE), they could track down their “arms” or non-tribal financiers, servicers, aiders, and abettors and put pressure on them.

Here is the part of the article that I find most compelling.  What it’s saying is if the CFPB goes after the TLE or “Covered Persons”, but will not be able to apply state law to their review.  CFPB is expressly prohibited from enforcing “usury”.  On a personal level, I’ve been frustrated at the draconian laws created in many states in connection with small loans.   The problem is that many of these laws hurt and piss off the consumer, not to mention make the lenders life miserable.

This conclusion, however, is not the end of the inquiry. Since the principal enforcement powers of the CFPB are to take action against unfair, deceptive, and abusive practices (UDAAP), and assuming, arguendo, that TLEs are fair game, the CFPB may have its enforcement hands tied if the TLEs’ only misconduct is usury. Although the CFPB has virtually unlimited authority to enforce federal consumer lending laws, it does not have express or even implied powers to enforce state usury laws. And payday lending itself, without more, cannot be a UDAAP, since such lending is expressly authorized by the laws of 32 states: there is simply no “deception” or “unfairness” in a somewhat more pricey financial service offered to consumers on a fully disclosed basis in accordance with a structure dictated by state law, nor is it likely that a state-authorized practice can be deemed “abusive” without some other misconduct.  Congress expressly denied the CFPB authority to set interest rates, so lenders have a powerful argument that usury violations, without more, cannot be the subject of CFPB enforcement.

What can happen is the CFPB comes down on acts that are characterized as deceptive or abusive as they pertain to the federal law, such as:

• Data-sharing issues
• Failure to give adverse action notices under Regulation B
• Automatic rollovers, failure to impose limits on total loan duration
• Excessive use of ACH debits collections

In a nutshell, they can make your life miserable.

The New York Times is causing a lot of damage to the online lending industry. First up is Chase: “Dimon Pledges to Change JPMorgan’s Practices on Payday Loans.”

I think the online lending industry might have just screwed itself.  It was in the form of a completely unnecessary risk.  Six lenders ach’ed a dead account, received nothing in return, and got the attention of the CEO of Chase.  We don’t have a fact checker, but if we take what the New York Times says at face value,   Here is the situation:

Ivy Brodsky, one customer in Brooklyn, was charged $1,523 in fees by Chase, after six Internet payday lenders tried to take money from her account 55 times in a single month.

You would think there is enough online data to prevent this person from getting a 5th and 6th loan.  I’m not suggesting a loan limit here, but we’re screwing each other.  If you divide the ACH’s equally, hypothetically, that’s 9 ACH’s per lender in a single month.

It would be catastrophic to lose the ACH privilege   That’s all I’m saying.

The New York Times bashed banks that help move money for off shore payday lenders.  The article is titled “Major Banks Aid in Payday Loans Banned by States”

The article itself is typical of most articles on payday lending.  It’s sensationalized and it selects a small sample as a baseline for judging the entire short-term loan industry.  Definitely worth the read because the New York Times is a big stage.

Here is where it fails, in my opinion:

• Most state laws are terribly written.  In many ways, they hurt the lender and the borrower.  Regulation is preventing better, more competitive products from entering the market.  
• It sites the ACH authorization as difficult to revoke.  My experience is if someone revokes an ACH authorization in writing, it will stick.
• Let’s be honest, everything can be bad or good depending on how you use it.
• Consumer groups are not embracing alternatives that may be better to a 522% payday loan.  They all take a super hard stance on anything over 36%.  This is not fair or realistic.

There is some good information in the article.  The industry is still growing.  There is a small shift from store-front to online borrowers.   OLA is right for pursuing a federal charter.  It’s impossible to deal with these states.  Too many conflict of interest there.

“While there are no exact measures of how many lenders have migrated online, roughly three million Americans obtained an Internet payday loan in 2010, according to a July report by the Pew Charitable Trusts. By 2016, Internet loans will make up roughly 60 percent of the total payday loans, up from about 35 percent in 2011, according to John Hecht, an analyst with the investment bank Stephens Inc. As of 2011, he said, the volume of online payday loans was $13 billion, up more than 120 percent from $5.8 billion in 2006.”

Now the Online Lenders Alliance, a trade group, is backing legislation that would grant a federal charter for payday lenders. In supporting the bill, Lisa McGreevy, the group’s chief executive, said: “A federal charter, as opposed to the current conflicting state regulatory schemes, will establish one clear set of rules for lenders to follow.”

Cordray said the agency is focusing on four red flags:

• deceptive practices
• debt traps
• structural roadblocks such as inaccurate credit reporting
• discrimination

The CFPB was  founded, in 2011, as a result of the Dodd–Frank Wall Street Reform and Consumer Protection Act.  It is a knee jerk reaction to the recession created by the housing bubble.  Do we need another government agency?      The following states are suing the CFPB because they believe the organization is unconstitutional.  They are:  Texas, Alabama, Georgia, Kansas, Montana, Nebraska, Ohio, and West Virginia. Oklahoma, South Carolina, and Michigan.

The Minnesota attorney general has settled with a Delaware based company SureCash.com.  For appr. 1,200 loans, Sure Cash agreed to pay $760,000 in restitution.   My math says about $633 per loan.

It seems like a petty argument by the governing body .  “The Ministry branch has been seeking since September to force The Cash Store to deliver payday loans in cash rather than electronically. But, the Cash Store says, electronic distribution is “much safer and efficient” and it is “unwilling to place employees and customers at risk of physical harm.”

The Cash Store‘s defense is that it’s not a payday lender anymore.  Here is the Cash Store statement:  the recent introduction of line of credit products in Ontario means the firm and related company Instaloans Inc. do not offer payday loans in the province. As a result, “the Registrar’s proposal to revoke the Companies’ payday loan licenses is not expected to cause any interruptions to the Companies’ current operations.”

Read more: http://www.ottawacitizen.com/business/fp/Cash+Store+Financial+seeks+appeal+proposal+revoke+lending/7926134/story.html#ixzz2KE1q1HNL

Things are looking very positive for (payday) lending in 2013.  I’m going to make the prediction that the name “Payday” is going away.  High interest / high risk loans are not going anywhere.  I think the concept of paying a loan in 2 weeks is going by the wayside.   It makes the situation uncomfortable for the lender and the borrower.

With that out of the way, what’s different about 2013?

• Think Finance proved that you can get big fast.  Gross revenue of ~$502 million in 2012.  This is remarkable because 2011 was ~$249 million.  Yep, that’s 100% growth.  
• High tech companies are getting into the mix, like LendUp and BillFloat trying to disrupt the industry.  Don’t forget Zest Cash, founded by a  former Google exec.  These companies are raising millions in capital from investors.  

Now the big pink elephant in the room.  Think Finance partners with banks and Indian tribes that allow them to avoid state scrutiny.  I say, good for them.  I’ve seen the terrible bills that have become laws in many states.  Most of them piss off borrowers and treat them like children.  Think Finance is able to offer financial products that provide borrowers that need cash with terms that are manageable.  Everything I’ve heard is that they treat their customers right.  That’s how real competition works.

What state legislators don’t realize (or don’t care) is that they are killing competition and it’s harming the consumer.  Many of these states are more interested in creating more state jobs and licensing revenue than helping the consumers in their state.  It will be interesting to see what happens on the federal level.  I know of at least 502 million reasons that it’s going to be interesting.

Here is how the state of Illinois treats lenders that try and follow the rules. There are states that are fair, but Illinois is not one of them. They will fine you $1,000 for a $300 loan. Does this make sense?

Every month they post their fines. Here is September’s Fine Report.

I guess this is what it’s come down to in Illinois.  Fines subsidize state jobs for people that are “allegedly” protecting consumers.  It’s not a surprise to me that Illinois is dominated by Democrats.  Here is an example of a fine.  This is a Veritec fine.

The lender entered improper information into the database.  For example, if you put in the borrower’s GMI (gross monthly income) as $2,100 when it should be $1,200, you’re getting a $1,000 fine.  Talk about playing GOTCHA.

To add insult to injury, the loan may be a writeoff.  The lender loses the $300 and gets smacked with a fine.

This Illinois law goes into effect on January 1, 2013.  Sponsored by Sen. William Haine (D-Alton) and Rep. Greg Harris (D-Chicago), HB 3935 provides consumers with greater protections by putting teeth into the penalty and declaring any such loan as “null and void.” Under existing law, the IDFPR may issue a cease-and-desist order to anyone doing business without the required license. Currently, 522 payday lenders are licensed and regulated by the IDFPR, which also regulates 1,054 Consumer Installment Loan Act lenders and 240 Sales Finance lenders.

Here is what Michael Helfland says about a class 4 felony.

“Class 4 felonies are considered the least serious and carry a minimum prison term of one year. Class 4 felonies include aggravated assault, stalking, and some drug possession (30 grams but less than 500 grams of marijuana), and felony DUI.”