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Payday debt trapFederal regulators at the Consumer Financial Protection Bureau are moving ahead with the development of rules to regulate the predatory payday lending industry and this is excellent news for vulnerable consumers in dozens of states. One sizable potential problem with the effort, however, involves states like North Carolina that have already had the good sense to ban the predators outright.

According to consumer advocates, if the feds aren’t careful in how they draft the new rules, they might conceivably legalize payday loans in places like North Carolina even as they’re cracking down on it in other states. Recently, dozens of the advocates in the states where payday loans  are already illegal (including several here in North Carolina) wrote the CFPB Director Richard Cordray urging him to carefully tailor any new rules to avoid  this problem.

In the letter, advocates urged the CFPB “to issue final rules that build on, rather than undermine, strong state protections and that enhance our ability to enforce them.”

The groups continued: “Indeed, it would be unacceptable for the CFPB to issue weak payday lending rules, which would likely usher in a new wave of predatory lending in non-authorizing states and throughout the country.”

Let’s hope the agency sees the obvious wisdom of allowing states to enact and keep consumer protection laws that are stronger than the soon-to-be implemented rules and of keeping the federal standards as a basic consumer protection floor, rather than a ceiling.

Click here to read the letter.

And for more information on stopping the payday lending debt trap, click here.

 

Commentary

President Obama 3Looking for something to restore your faith in our government? Then check out the new rules adopted yesterday by the Obama administration to clamp down on predatory lenders who take advantage of American servicemen and women.

The new Department of Defense rules, which were announced Tuesday by the President in a speech to the Veterans of Foreign Wars, update the Military Lending Act—a 2006 law that capped interest rates and add-on fees to members of the military and their families at 36 percent.

Unfortunately, the original 2007 regulations implementing the law capped rates for just a small number of loan types, such as payday loans of 91 days or less and so-called “car title loans” of 181 day or less. Since that time, sharks have evaded the rules by simply extending the terms or restructuring the loans — thus allowing them to continue to target service members (something that often impacts their security clearances and even jeopardizes their careers).

Happily, the new rules take big step toward putting an end to these evasions in that they:

  • Apply market-wide to all high-cost credit products that target service members, including payday, auto title and installment loans designed to evade the 2007 protections;
  • Cap interest and add-on fees at 36 percent for loans issued to service members and their dependents;
  • Prevent lenders from using junk fees such as credit insurance, debt cancellation or debt suspension to circumvent the 36 percent interest and fee cap.
  • Preserve service members’ access to the courts by prohibiting forced arbitration agreements;

Research by the Department of Defense released last year found that as many as one out of every ten enlisted serviceman and woman continued to be targeted by high-cost credit designed to evade the Military Lending Act. DoD estimates that the final rule will reduce involuntary separation caused by financial hardship, resulting in a savings of $14 million a year or more.

The rules come as a particular boon to North Carolina, home to tens of thousands of active military personnel and one of the nation’s largest military populations.

Of course, the obvious next step for federal regulators in the years ahead is to extend the protections now afforded to active military personnel to all individuals affiliated with the military and, eventually, all American consumers period. Let’s get to work.

Commentary

The indictments of the often-predatory for-profit college industry continue to pile up. This is from a new article by Prof. Stephanie Cellini for the Brooking Institution in which she argues that public community colleges are regularly a much better bet for students:

“Some back-of-the-envelope calculations suggest that for-profit associate’s degree students need at least an 8.5 percent annual earnings gain to cover the cost of tuition, foregone earnings, and debt service at a typical for-profit college. Our estimates fall short of this threshold, suggesting that for the average student, the earnings gains are too low to justify the cost and generate a positive return on investment. It also suggests that many students may not have full or accurate information on the earnings gains that they can expect post-college.

How do these estimates compare to the social costs of a for-profit education?  Adding in costs to taxpayers in the form of federal student grant aid, loan defaults, and other sources of federal funding would require a 9.8 percent earnings gain to cover the cost to the individual and society. In the public sector, despite higher taxpayer costs, the much lower costs to students means that  only a 7.2 percent annual gain is needed to cover the combined private and social costs—a figure well below current earnings gains estimates in that sector. These figures again suggest that—on average—public institutions may be a better deal for students and taxpayers.”

Of course, as Lindsay Wagner reported recently, lousy performance is far from the only common problem when one patronizes the for-profit college industry. There’s also the risk of blatant, predatory rip-offs.

Commentary

Payday loans.jpgThe federal Consumer Financial Protection Bureau is unveiling some long-awaited proposed rules targeting the predatory payday lending industry at a big hearing in Richmond, Virginia today and you can follow along on Twitter at the hashtag #StoptheDebtTrap. Generally, the proposed rules amount to a promising start. There are, however a few worrisome potential loopholes. The good people at the Center for Responsible Lending explain:

Consumer Financial Protection Bureau to Limit Payday Loan Debt Trap; Curb 400% Interest Rate Loans

The Consumer Financial Protection Bureau will offer a first look at where the agency’s efforts to rein in the abusive practices of payday and car title lenders are headed at a Thursday hearing in Richmond, VA. The consumer agency will release information outlining their deliberations and take testimony from a panel of consumer and civil rights advocates as well as industry representatives.

Mike Calhoun, President of the Center for Responsible Lending, will present testimony at the hearing.

Calhoun comments on the proposal:

“The proposal endorses the principle that payday lenders be expected to do what responsible mortgage and other lenders already do: check a borrower’s ability to repay the loan on the terms it is given. This is a significant step that is long overdue and a profound change from current practice. If made mandatory, the ability to repay standard will help millions of borrowers avoid dangerously high-cost payday and other abusive loans. The requirement would prevent debt traps, an all-too common practice where a lender flips loans over and over and the consumer ends up paying double the amount borrowed in interest and fees. And the Bureau appropriately applies the standard to both shorter and longer term loans, including vehicle title loans.

At the same time, we are deeply concerned about provisions in the proposal, the so-called “debt trap protection options,” which would in fact permit payday lenders to continue making both short- and longer-term loans without determining the borrower’s ability to repay. The industry has proven itself adept at exploiting loopholes in earlier attempts to rein in the debt trap. The consumer agency can look to necessary revisions to the Military Lending Act after widespread abuses were found, dragging active service members into debt so damaging that a Defense Department report found it undermined military readiness.

These “options” are an invitation to evasion. If adopted in the final rule, they will undermine the ability to repay standard and strong state laws, which give consumers the best hope for the development of a market that offers access to fair and affordable credit.

We urge the consumer bureau to adopt its strong ability to repay standard without making it optional.”

Let’s hope the regulators are listening.

Commentary
Photo: MoneyMutual

Photo: MoneyMutual

There is another small ray of good news today in the long-term battle to rid the nation of the predatory scalawags in the payday loan racket. After years as serving as the well-compensated barker for the sharks at MoneyMutual, TV pitchman Montel Williams has announced that he will stop endorsing the company. The announcement came just a day after the New York Department of Financial Services announced a settlement with owners of MoneyMutual that prohibits the company from doing business in New York and requires it to pay a $2.1 million penalty. Give you any ideas, Attorney General Cooper?

This is from the settlement announcement:

Superintendent [of Financial Services Benjamin] Lawsky said: “Using Mr. Williams’s reputation as a trusted celebrity endorser, MoneyMutual marketed loans to struggling consumers with sky-high interest rates – sometimes in excess of 1,300 percent – that trapped New Yorkers in destructive cycles of debt. The company made special efforts to target the more than 55 percent of their customers who were ‘repeat clients’ – including so-called ‘Gold’ customers who took out a new loan to pay off a previous loan. We are pleased that they have agreed to resolve this matter and stop marketing these illegal, usurious loans to New York consumers. Our investigation into the lead generation industry continues.”

Today’s MoneyMutual agreement is the first successful enforcement action against a payday loan “lead generation” company penalizing it for its unlawful conduct. Lead generation firms do not typically make payday loans directly, but instead set up websites marketing those illegal loans. Through promises of easy access to quick cash, the lead generation companies entice consumers to provide them with sensitive personal information such as social security and bank account numbers, and then sell that information to payday lenders operating unlawfully in New York and other states. In December 2013, DFS issued subpoenas to 16 online “lead generation” firms, including Selling Source/MoneyMutual, which were suspected of deceptive or misleading marketing of illegal, online payday loans in New York.

Let’s hope state officials keep Selling Source (aka “MoneyMutual”) on the run and that, at some point, Mr. Williams offers a public apology to the thousands upon thousands of vulnerable Americans he’s helped connect to these sharks. We won’t get our hopes up, though, that he returns the gazillions of dollars he’s no doubt been paid or, better yet, donates it to a worthy cause.