Industry News Payday Loans

Confirmation bias is a tendency of people to favor information that confirms their beliefs.   The CFPB does not identify with the short-term product or the people that use it.  They just don’t like it and their going to find any data they can find to build a case against the industry.  They want to stick everyone in the industry into one bucket, and the lenders that are providing a valuable service to borrowers get screwed.

The CFPB has taken a one-sided, biased and small data sample from The Pew Charitable Trust on payday loans.   For example, doing an interview with 451 to 703 in-depth interviews.  How you interview people and what questions you ask can severely influence people?   We have turned into a victim society.  Rather than asking people to take responsibility for their choices, we turn them into victims.   Once their “victims” they are unable to improve their life situation.  They stick society with the bill.

So what is the solution?  Eliminating the use of deceptive practices.  The CFPB should work with the payday loan industry to make these products more transparent and the terms more understandable.

I guess I don’t understand why the payday loan industry is so different from other industries, but I do know the reason.  The government inhibits competition by over-regulating the industry.  This stops innovation and competition.  Remember how expensive it was to fly before the travel sites sprouted?  Buying a car online has completely changes the automobile industry.  Instead of evolving, the CFPB is going to push the industry underground.

Interested in reading more….Tim Rainy of Clarity writes to the NY Times in response to the Pew Trust research.

In the past, class action lawsuits have been more akin to extortion than resolution.  The Washington post writes, the Supreme Court voted 5 to 3 to hold up the arbitration agreement in a case between American Express and a group of retailers.

My opinion is that most class action law suits are about making money for the lawyers and the “victims” get a couple bucks.  The travesty is that these class action law suits pit your own lawyers against you by amassing gratuitous legal fees for the defending party.  Rather than settle a class action law suite quickly, the attorney(s) drag it out to inflate their legal fees.

Does this mean that customers have lost their recourse?  Of course not.  They just have to go through an independent third party arbitrator first.  Arbitration is not cheap, but it’s better than the vultures.

You can read more about arbitration agreements at Nolo.com.

Here are few class action lawsuits that settled for large sums in the cash advance industry:

$7.5m  Dennis Herrera v. Check N’ Go of California, Inc., et al.

$1.6m Cardegna v. Buckeye Check Cashing (dba CheckSmart)

$600k Reuter v. Ace Cash Express

Integrity Advance is the latest of eight Internet lenders fined by a Minnesota judge writes the Star Tribune.  The company was fined $8m on 1,269 loans.  This is approximately $6k per loan.  This is ridiculous   It’s obvious that Minnesota is very hostile when it comes to unlicensed Internet lenders.

It’s not surprising that lenders operate outside of the Minnesota law.  Minnesota payday loan fees are some of the lowest in the country and they do not allow rollovers.

Business Week wrote an article titled, Payday Lenders Evading Rules Pivot to Installment Loans. The trend of large payday lenders moving to installment products.  Lets be honest, payday loans have a huge target on their back.  An installment loan can be no different than a mortgage loan and it’s fundamentally better than a credit card or line of credit.

A couple of notables from the BW article:

On May 14, Rohit Dewan, a financial analyst in the consumer bureau’s Office of Installment and Liquidity Lending, said on a conference call with analysts that an installment loan “seems like a safer product” than a payday loan.

Thomas Bessant, chief financial officer of Cash America, said that’s one reason “the subprime category of installment products” has become a new focus for the firm.

Think Finance seems to be a step ahead.  Ever since the NY Times lambasted Chase for improprieties relating to the ACH system, the wheels have been turning.  Their next product goes straight the employer and bypasses the borrowers bank account.  This payday loan alternative is called My Salary Line.  Biz Journals writes, “Bob Johnson marketing alternative to payday lending.”

This concept is not new.  When my parents bought me my first car, it was back in 1993 and my mom’s credit union required a payroll deposit for the payment, in exchange for a lower rate.  36 months later, we owned it.

In states where installment loans trump payday loans, these advances are called “paycheck” loans.  The loan comes out of the proceeds of your pay check.  Makes sense.  Think Finance has a powerful partner on their side.  Bob Johnson who founded BET is on board.  When asked about the morality of the product, he responds:

“If you can do well and do good, God bless you.  I’m trying to create business solutions to social problems.”

It seems here that the employer / lender relationship plays a big role.  Think Finance wants the employer to solicit these loans and make the argument that they’re cheaper than payday loans.  This will put Think Finance ahead of the borrowers bank, which is a huge advantage.

Clarity is a real-time credit bureau for the alternative finance industry.  Based on my personal experience, they have a lot of passion for the industry.  Now, you can also call them ambitious…..

Clear Recent History, is being made available at no-charge for storefront providers who contribute loan data to Clarity.

What is Clear Recent History?

“As a trade line report designed for storefront small dollar credit providers, Clear Recent History provides key information such as consumer’s loan activity over the past 90 days, loan inquiries, detailed trade line information for open and closed loans, past due amounts, and collections and charge off activity. It also indicates whether the consumer has applied for small dollar credit in the last month and year, and the number of days during the past month and year a consumer had one or more loans open.”

I already use Teletrack.  Why do I need Clarity?

If you’re wondering what your customers are doing online, Clarity is going to help you.

I’m a lender.  How can I take advantage of this deal?

Contact sales@clarityservices.com, or join a webinar at http://www.clarityservices.com/webinars.

How do I report loan data back to Clarity?

The easiest way to report back to Clarity is through your LMS (Loan Management System).  Otherwise, you can report manually through Clarity’s website.

You may read the full press release HERE.

Get a load of this. A California bank offering a payday alternative bites the dust. It’s unfortunate because I think competition is good.  I wish their model was sustainable.

What does not get enough press is that 20-30% of borrowers default on their loans. This is the primary reason payday loans are expensive. Payday lending is just like any other business. The losses need to get spread out or you lose money.

This article was in the American Banker: “California Thrift’s Woes Show Challenges Competing with Payday Lenders.”  Here are the highlights:

One PacificCoast Bank in Oakland, Calif., is regrouping as it looks to battle payday lenders in the San Francisco Bay area.

The $282 million-asset thrift recently pulled the plug on its One Pac Pal loan, which it tailored to offer low-income clients short-term credit at reasonable rates and terms. The program, which began 18 months earlier, lost too much money, says Kat Taylor, One PacificCoast’s chief executive.

“We have not yet found an economically sustainable product that’s sufficient to save enough people” from payday lenders, she says.

We still have until May 28th, until we’re out of the woods in Texas.  This is when the  legislative session ends, but things are looking positive for the payday loan industry, in Texas, according to Rep. Mike Villarreal (D- San Antonio) – the House sponsor.  Not sure if this is the white flag or a hail-Mary. He posted to his Facebook page:

“After months of work on payday and auto title lending reform, it’s hard to accept that we may not have the votes to move forward with meaningful protections for consumers. Texas has a long history of free markets, but we also have a long history of protecting consumers from usury. Our state’s current approach to payday and auto title lending is a break from that honorable tradition. Our most vulnerable citizens pay the price. I’m still working to find a path forward.”

He tweeted over the weekend,

“Planning interim. Will travel state to advance payday auto title ordinances one city at a time with Coalition for Fair Lending.”  

It looks like he’s going to attack the industry at the city level by imposing zoning limits on payday lending store fronts.  This will provide a big boost to Internet lenders.

You can read the full article titled, “Payday lending bill’s prospects dwindling“

In a terribly written (and researched) article at CNBC titled “Payday Loans Cost Economy $1 Billion in 2011: Study“, the only good thing are the comments.  There are many:

Waaaiiitt a minute. Didn’t the people who collected the interest on the payday loans also participate the economy? Didn’t those loan sharks go to restaurants, buy cars, go to the movies, etc.? Is CNBC letting the interns write the articles again? Just because someone is gouging someone else doesn’t mean the money is lost to the economy. It just means that the money is moved from the disadvantaged, or stupid people to the wise guys. Sort of like the retail brokerage business.

juDiamond | May 3, 2013 02:44 PM ET

And Banks take $36 Billion a year out of peoples pockets with HIGH FEES PHONY FEES EXHORBITANT FEES USURY FEES Sid Feinberg hit the nail on the head….good job sir!

rk | May 3, 2013 02:46 PM ET

I agree with PaulMcGee. I’m pretty sure that the “loan sharks” didn’t burn the money that they earned. It went back into the economy. The other point about charging Interest rates of 200-500%, seems like Usury. At those rates, there must be a reason that more people don’t get into the business and undercut the market. Maybe the risks of these loans are very high, and the high rates are needed to cover the losses from those who don’t pay back their loans.

thereugoagain | May 3, 2013 02:49 PM ET

Wait …..the government took over student loans and screwed it up …maybe they should try again ….nationalize all of the Payday Loan operations and put Joe Biden in charge!

BurbankBurner | May 3, 2013 03:49 PM ET

As usual we have “busy body” liberals, imposing their ignorance on the population. Since ALL of their statistics are made up, there is no reason to attack this industry. If the snotty, elitist, liberals would come down from their east coast perches, they might learn what really goes on in these pay day loan centers. But since none of them hablar espanol, they won’t have a clue about what they continue babbling to all who are dumb enough to listen.

sidfeinberg | May 3, 2013 03:57 PM ET

Banks, auto loans, and MORTGAGES do the same thing. I just provide a service to a desire in the market. Pay Day loans are quicker than a traditional bank. Banks are worse than any store we own and they are glorified by the press. A whore is a whore

bpl828 | May 3, 2013 05:45 PM ET

$1Billion? Chump change! Just let the Fed take care of it. They are spending almost, errrr, printing almost 100 times that amount each month! Pennies! C’mon!

Radical_1 | May 3, 2013 07:48 PM ET

If you don’t like the rates, don’t take out the loans! It’s that simple. As long as there are people willing to pay these rates I don’t see anything wrong with them charging whatever they can get for their services. The retailers are no different as they’ve been raking us over the coals for decades, charging 100% and more mark-ups from their cost for nearly everything they sell. Just think of how much more money every consumer would have if these people just charged what they needed to make a decent profit instead of an outrageous profit. The people would be a whole lot better off, but thats not the way it works in the US anymore, now days they charge the max they can get, so whats wrong with the Pay Day lenders doing the exact same thing. TRUE CAPITALISM AT WORK, RIGHT?

Two articles worth mentioning because the payday industry is fighting a PR battle.  Both are from the CFSA.  The first article in the American Banker, “Payday Lenders Lash Out at CFPB“.  Here is what the letter to the director, Richard Cordray, said:

“Not only are the data demonstrably incomplete and misleading, but the conclusions, and specific language within the report seem aligned with the type of rhetoric that more often comes from advocacy groups that are not always driven by facts.”

The other article is an Op-Ed piece in the New York Times titled, “Need for Payday Loans” by Dennis Shaul of the CFSA:

“Thirty-four states recognize a need for these loans and the important role that regulated, licensed lenders play in credit markets. Consumers in states without adequate payday lending laws have turned to unlicensed offshore lenders in the absence of regulated storefronts, and these loans come at higher rates and expose consumers to the risk of fraud and identity theft.”