CFPB Brings Action Against ACE Cash Express for Bullying Borrowers Into Borrowing Again

The CFPB has announced an action against ACE Cash Express for pushing borrowers into cycles of debt, and using harassment and false threats of criminal prosecution to do so. ACE is one of the largest payday lenders in the U.S., marketing loans and related services both online and through 1,500 retail storefronts in 36 states and the District of Columbia. Specifically, the CFPB found that ACE was guilty of:

  • Threatening to sue or prosecute consumers who did not make payments, using legal jargon even though the company did not actually sue for non-payment of debts.
  • Threatening to charge extra fees and report consumers to credit reporting agencies, even though as a matter of corporate policy ACE debt collectors could not do either of those things.
  • Harassing consumers with collection calls in an abusive manner, and calling consumers’ employers and relatives to share details about their debts.

The harassing coercion tactics used by ACE resulted in cash-strapped consumers being bullied into cycles of debt.  A striking graphic uncovered by the CFPB in the investigation, and made public, makes clear that this was deliberate company policy.  The graphic, which was a part of ACE’s training manual, puts application for a new short term loan as the step after collection efforts on the previous loan.

ACE Debt Cycle

With its outrageous conduct (and its training manual), ACE Cash Express provides a fresh reminder of why the CFPB needs to write strong rules to end payday lending abuses.

-  Rebecca Thiess

The CFPB at Three: A Child Prodigy

(By Ed Mierzwinski, USPIRG) The Consumer Financial Protection Bureau (CFPB) turned just three years old Monday, July 21st, but when you look at its massive and compelling body of work, you must wonder: Are watchdog years like plain old dog years? Is the CFPB now a full-sized, 21-year-old adult?

The answer is no, not yet. The CFPB is still growing and developing and adding programs and projects. The CFPB is, however, at three years old, certainly a child prodigy.

The CFPB was established as an integral part of the Wall Street Reform and Consumer Protection Act enacted in 2010 to fix the mess created when banks ran amok, resulting in the Great Recession that began with the September 2008 economic collapse.

It is the nation’s first financial agency with just one job, protecting consumers. It’s also the first federal agency with authority over the full financial marketplace, so consumers are protected whether they shop at a bank, non-bank mortgage company or payday lender, or are harmed by credit bureau mistakes or debt collector abuses. It even has special offices to protect older Americans, servicemembers (and veterans) and students.

In poll after poll (new Lake poll for PIRG-backed Americans for Financial Reform), the American people overwhelmingly support the CFPB and ongoing Wall Street oversight. Nevertheless, the CFPB remains subject to withering attacks from the financial industry whose tricks and traps led our economy into collapse.

After you take a look at some of its successes and some of its work in progress, we think you’ll agree: the idea of the CFPB needs no defense, only more defenders.

The CFPB is protecting credit card customers: It has ordered five of the nation’s six biggest credit card companies — Capital One, Discover, American Express, Bank of America and JP Morgan Chase — to return a total of $1.5 billion dollars directly to the consumers they ripped off with fraudulently-marketed, junky add-on products. And in June, it ordered GE Capital (now Synchrony) to refund more than $225 million for illegal and discriminatory credit card practices (CFPB Enforcement blog page).

The CFPB is helping with complaints: The CFPB has established a Public Consumer Complaint Databasethat is already the nation’s largest collection of financial complaints, with more than 400,000 complaints about banks, credit bureaus, credit cards, debt collectors, private student lenders and mortgage companies received so far. Just last week, the CFPB proposed(and seeks comments for 30 days) an important enhancement to the database: By posting narrative contextual details of consumer stories, it will be easier for bank examiners, researchers, other consumers and even financial firms themselves to determine whether bad practices are isolated or common.

The CFPB is protecting students from unfair practices: Earlier this year, the CFPB filed a lawsuit against the for-profit college ITT Educational Services, arguing that they engaged in predatory student lending practices that push students into high-cost private student loans that inevitably will default. The CFPB has also investigated the growing use of high-fee debit cards to disburse student loans, and issued “Know Before You Owe” tools for student consumers.

The CFPB is helping stop fraud against servicemembers, veterans and their families:The CFPB’s Office of Servicemember Affairs targets financial frauds and scams aimed at military families and veterans. Sadly, it’s a big problem. In November, the CFPB obtained $14 million in servicemember refunds from Cash America, a payday lender that violated the Military Lending Act.

The CFPB is reining in debt collector abuses: As a 21st century, data-driven agency, the CFPB is keenly aware that debt collection complaints have rapidly eclipsed all others in its complaint database. Consequently it is looking very closely at debt collector practices. This month, the CFPB fined payday lender Ace Cash Express $5 million and ordered it to return an additional $5 million to its customers for illegal debt collection tactics. It also filed a lawsuit against a “debt collection lawsuit mill” for using “illegal tactics to intimidate consumers into paying debts they may not owe.”

The CFPB is forcing credit bureaus to do a better job: The often-lethargic credit bureaus are responding to the recommendations in the CFPB’s comprehensive report on the industry. In particular, the so-called Big Three bureaus — Experian, Equifax and Trans Union — have agreed to share full consumer complaint files with creditors during reinvestigations, instead of merely converting the details into a 2-digit code meaning, for example, “Consumer says not my account.” Without the details, how could the creditor determine whether the consumer had a valid dispute?

The CFPB is listening to consumers: In addition to taking consumer complaints, the CFPB is urging consumers to simply tell their financial stories, good or bad (Watch videos of stories or tell your own story here). The CFPB is helping consumers with its “Ask CFPB” tool. It’s been on the road all over the country, to hear from consumers and small bankers in the communities where they live and work, from El Paso and Long Beach to Des Moines, from Boston to Itta Bena, Mississippi.

Over the next six months, the CFPB is expected to take major steps in three important areas where powerful industry forces may challenge it. But already, the House of Representatives has passed appropriations amendments designed to eliminate the CFPB’s independent funding. No other bank regulator is subject to the politicized appropriations process, for good reason. Earlier this year, theHouse passed a broader package designed to cripple the bureau.

The same lobbies that supported rolling back the CFPB’s independence are expected to oppose its pending efforts to protect consumers.

Soon, the CFPB is expected to propose rules regulating the exploding prepaid card market. Credit cards are heavily regulated, with debit cards, payroll cards and gift cards somewhat regulated, but the rapidly-growing general purpose prepaid card market is generally not regulated at all. The CFPB is also expected to propose rules governing high-cost, short-term payday loans that some, but not all, states have regulated. Finally, the CFPB was tasked by Congress to investigate whether small-print binding arbitration clauses in “take-it-or-leave-it” financial contracts encourage companies to ignore the law, because their customers cannot take them to court. If it so finds, the CFPB is authorized to ban or regulate the clauses.

Each of these projects threatens one or more powerful special interests that have long challenged the CFPB’s activities, and they are expected to escalate their attacks if the CFPB’s reforms go forward in a pro-consumer way. Consumers who depend on the CFPB to make markets work fairly, for both consumers and good actors, will need to step up and support the CFPB. After all, the idea of the CFPB needs no defense, only more defenders.


Originally published on US PIRG.

SunTrust Systematically Ignored Loan Modification Appeals, TARP Watchdog Finds

“SunTrust so bungled its administration of the program that many homeowners would have been exponentially better off having never applied through the bank in the first place.”

So said the Special Inspector General for TARP (SIGTARP), Christy Romero, regarding SunTrust Mortgage Inc.’s handling of dollars received through the Troubled Asset Relief Program (TARP) to go toward helping struggling homeowners.

Earlier this month, SIGTARP announced—along with the Department of Justice, the Federal Housing Finance Agency’s IG, the U.S. Attorney’s Office for the Western District of Virginia, and the U.S. Postal Inspection Service—a prosecution agreement resolving a criminal investigation into SunTrust’s administration of the Home Affordable Modification Program (HAMP). HAMP was created in 2008 as part of the Troubled Asset Relief Program (TARP), in order to help eligible homeowners with loan modifications on their home mortgage debt.

In documents that were filed along with this case, it was revealed that SunTrust, which received $4.85 billion in federal taxpayer funds through TARP, both misled mortgage servicing customers who sought mortgage relief through HAMP and failed to process HAMP applications. The company was so negligent that they put piles of unopened homeowners’ applications in a room, the floor of which actually buckled under the weight of unopened document packages.  Their practices meant that many homeowners were improperly foreclosed upon, as documents and paperwork were lost and applications were completely ignored.

The company has agreed to pay $320 million to resolve the criminal investigation into its HAMP program. Despite the egregious nature of what they did, it is worth noting that this is less than one half of one percent of its servicing portfolio (as of December 2013).Of the money SunTrust has agreed to pay:

  • $179 million will go toward restitution for borrowers to compensate for damage done by the company’s mismanagement. If more than $179 million is found to be needed, the bank has agreed to guarantee an additional $95 million for restitution on top of that.
  • $16 million will go toward forfeiture, to be available for law enforcement agencies working on waste, fraud, and abuse matters related to TARP.
  • $20 million will go to establish a fund that will be distributed to organizations that provide counseling and other services to distressed homeowners.

SunTrust is also required to implement corrective measures to prevent problems like the ones that led to this investigation, including increasing their loss mitigation staff, monitoring their mortgage modification process, and providing semi-annual reports on their compliance with this agreement.

- – Rebecca Thiess


Cleaning Up the Credit Card Industry

This week marks the five-year anniversary of the passage of the CARD Act, a piece of legislation that cleaned up some of the worst tricks and traps harming consumers in the credit card marketplace. The purpose of the CARD Act was two-fold: to prohibit certain unfair and abusive practices and to increase the transparency of rates and fees associated with credit cards. Congress passed the CARD Act — also often referred to as the Credit Cardholders Bill of Rights — in May 2009 with broad bipartisan support in both chambers of Congress, but after a hard fight.

Credit card lending had always been the most profitable form of consumer lending, according to annual reports by the Federal Reserve Board. But in the 10 years leading to the CARD Act, the largest card companies ratcheted the thumbscrews down on consumers, aided by lax regulators and by a series of court decisions preempting stronger state consumer laws.

The card companies did a number of things. First, they increased penalties on late pays. Then they tricked more consumers into paying late by using unfair practices, such as changing due dates randomly, shortening the period between when a bill was mailed and due, and even charging late payments when a bill arrived on a Monday, but its due date was the impossible Sunday before it. They then said that higher late fee penalties weren’t enough; they imposed penalty interest rates as high as 36 percent APR on bills received as little as an hour late. This wasn’t enough. They invented “universal default”: imposing penalty rates on consumers who’d never been late, but whose credit score had dropped.

Basically, the widespread use of penalty interest rates meant that consumers often experienced a gap between the stated interest rate of a credit card at the outset and the actual cost of the card over time. Much of this was due to these “penalty” interest rates — those triggered by late payments or by going over one’s credit limit. And when penalty rates were applied, they could be applied to both new purchases and existing balances, adding significantly to the cost, and meaning that the rate increased retroactively on purchases already made.

In short, pricing was opaque and the fine print that came with cards was difficult to decipher — often leading to costs much higher than those card users anticipated.

Thanks to the CARD Act, tricks like these have significantly declined. Now, interest rates provided at the outset of receiving a credit card more accurately reflect the actual cost of the credit card. The legislation restricted the amount of upfront fees card issuers can charge, limited “back-end” penalty fees when late payments are made or credit limits exceeded, and perhaps most importantly, narrowed circumstances when issuers could raise interest rates, especially on previous balances. The act also prohibited issuers from extending credit to consumers without determining an ability to repay, determined that late fees and other penalties must be “reasonable and proportional” to the violation of the account terms, and imposed new rules to protect young consumers.

Unsurprisingly, and in spite of industry arguments during the fight over the legislation that it would only shift or increase costs for consumers, changes to the credit card marketplace have saved card users money. A lot of money. The Consumer Financial Protection Bureau found in its report on the CARD Act, which reviewed impacts of the legislation, that provisions limiting penalty fees have saved consumers $4 billion annually. Additionally, the report found that the overall cost of credit has fallen by roughly 2 percentage points. An academic study on the CARD Act found that the legislation’s limits on fees reduced borrowing costs to consumers overall by 1.7 percent a year, and had a still more dramatic impact for borrowers with lower credit scores; people with credit scores below 660 saw their borrowing costs go down by 5.5 percent. All in all, this study found an even larger impact than the CFPB report, calculating that fee reductions as a result of the CARD Act have saved consumers a whopping $12.6 billion per year.

Five years after passage of the CARD Act, the CFPB is continuing to take needed action to protect consumers from abuses that continue in this market. First, the agency is doing the important and necessary job of enforcing the CARD Act. In October 2012, the bureau took action against three American Express subsidiaries for multiple violations, including charging late fees that were unlawful under the CARD Act. Second, the agency is using its authority to stop companies from using deceptive tactics when dealing with consumers, in particular from selling abusive add-on products, such as for payment protection, which frequently provide very little, if any, actual benefit.

In April 2014 the agency reached a settlement with Bank of America around its findings that the bank misled customers regarding what they would receive if they purchased payment protection products, as well as charging them for those products without their consent. The CFPB investigation found that some consumers were actually being enrolled in payment protection plans when they were being told they were simply consenting to receive more information about the product. These payment protection products generated hundreds of millions in revenue for the bank, with many customers paying $12.99 per month for services they either thought were more robust than they actually were, or did not know they had signed up for at all. The bureau ordered the bank to pay $727 million to nearly 2 million consumers who had been subject to illegal practices.

In total, the CFPB’s actions — since it fully opened its doors only three years ago — to curb illegal and deceptive credit card practices have resulted in about $1.5 billion in restitution for roughly 10 million consumers, along with around $100 million in civil penalties paid to the CFPB. In addition, the bureau has changed practices in the marketplace. Whereas most big banks used to sell add on products, a number of them have changed their practices, thanks to the CFPB’s enforcement actions. Discover and Capitol One, for instance, were ordered by the bureau to stop their deceptive marketing practices for these products.

The CFPB is doing good work in the wake of the passage of the CARD Act to increase fairness and transparency in the credit card marketplace, but the job is not finished. Even with the CARD Act in place, it remains difficult for consumers to understand the costs of, and risks associated with, specific credit card choices, and to compare cards to each other. As Sen. Elizabeth Warren, D-Mass., has said, “our next challenges will be about further clarifying price and risk and making it easier for consumers to make direct product comparisons.” Along with further improvements in the credit card market, there is important work to be done to make sure prepaid and debit cards develop as safe and convenient products, and are not loaded up with hidden fees or gotcha credit features.

– Rebecca Thiess

Originally published on

A Fresh Chance for Congress to Do Right by the CFTC

As the appropriations process moves forward this month and next, lawmakers again have a chance to properly fund the Commodity Futures Trading Commission. This is an agency whose responsibilities have far outstripped its resources, as detailed in an AFR fact sheet and charts of the agency’s workload versus budget and workload versus workforce.

The CFTC plays a crucial role in financial regulation. In the first place, it oversees the commodity derivatives markets, which help determine the price of everyday items ranging from gasoline to bread. The Dodd-Frank Act also gave the CFTC responsibility for the vast and previously unregulated financial derivatives markets, which helped crash the world economy in 2008. With its expanded mandate, the CFTC has seen an eight-fold increase in the size of the markets it is charged with overseeing. Yet the Commission has yet to receive anything close to the funding proposed by the administration or sufficient to do its job. — Marcus Stanley


Underwater America: Where the Share of Underwater Mortgages is Highest

A new report from UC Berkeley’s Haas Institute challenges the notion of a national housing recovery. While overall rates of foreclosure and mortgage delinquency have fallen since the height of the housing crisis, many areas of the country have yet to see much improvement, according to Underwater America: How the So-Called Housing ‘Recovery’ is Bypassing Many Communities.”

At the end of 2013, the report points out, some 9.8 million Americans – more than a fifth of all homeowners with a mortgage – remained underwater, owing more than their homes were worth. Because homeowners with negative equity are significantly more likely to default than are homeowners with positive equity, these findings make it clear that a great many families still face a high risk of losing their homes.

Ten percent of Americans live in the 100 cities with the most troubled housing markets – cities where, according to the report, between 22 and 56 percent of homeowners are underwater. Those cities include Hartford, Conn. (with a 56% underwater rate); Newark, N.J. (54%); Elizabeth, N.J. (52%); Paterson, N.J. (49%); and Detroit, Mich. (47%).

The report also identifies the 15 metropolitan areas and 395 ZIP codes with the highest incidence of underwater mortgages. The hardest-hit zip codes, many with underwater rates above 60%, can be found in Georgia, Michigan, Texas, Nevada, and Connecticut. (See tables of hardest-hit areas.)

The report concludes that far more needs to be done to prevent foreclosures and mitigate the damage to families and communities. It calls for greatly expanded use of principal reduction, recommending several policy paths to that end.

– Rebecca Thiess

A Rule to Rein in Wall Street Pay Is Too Weak and Way Behind Schedule

Three and a half years have passed since the 2010 passage of the Dodd-Frank financial reform legislation. While some important elements of the law have been implemented (the Consumer Financial Protection Bureau has been hard at work, for example), other provisions simply seem to have been ignored. One crucial reform, targeted at Wall Street’s “heads I win, tails you lose” culture of lavish pay and nonexistent accountability, remains in bureaucratic limbo.

There’s no question that the flawed incentives in Wall Street pay packages played a major role in creating the financial crisis. The Financial Crisis Inquiry Commission, the official body charged with investigating the causes behind the financial and housing market crashes, found that pay systems too often encouraged “big bets” and rewarded short-term gains without proper consideration of long-term consequences. The practice of awarding large bonuses and other forms of immediate compensation creates incentives to ignore long-term risks and “take the money and run.”

Former Securities and Exchange Commission Chair Mary Schapiro described the situation to the commission in this way: “Many major financial institutions created asymmetric compensation packages that paid employees enormous sums for short-term success, even if these same decisions result in significant long-term losses or failure for investors and taxpayers.” To take just one example, top executives of Bear Stearns and Lehman Brothers – the two big investment banks whose failure triggered the crisis – got paid $2.5 billion in the years leading up to the financial collapse. Despite their firms’ disastrous collapse, they got to keep every dime of it.

Risk-taking of this sort wasn’t always how things worked on Wall Street. In the decades after World War II, many of the big investment banks were private partnerships, meaning that senior managers’ funds were constantly at risk and they could only collect their full payouts upon retiring, as opposed to in annual bonuses or stock options. During the decades after the war, in fact, pay inside the financial industry was roughly equal to pay outside of the industry. However, when investment banks went public in the 1980s and 1990s, bets were increasingly made with the money of shareholders, and firm pay structures began to reward the risk-taking that would lead to short-term paydays for companies, at the price of longer-term stability.

The Dodd-Frank financial reform law includes a specific provision to address precisely this problem, but it hasn’t been implemented yet. Section 956(b) of the law requires that financial regulators ban any type of incentive pay arrangements at banks that act to encourage inappropriate risk-taking. The statute tells regulators to write rules to implement the ban within nine months of the signing of the law. Yet today, almost four years after the law was passed, regulators still have not put these required restrictions on Wall Street pay in place.What’s more, not only do the rules remain unfinished, but the initial proposal by the regulators was much too weak to get the job done. The regulators initial proposal to implement Section 956(b) includes general language telling bank boards of directors to design pay packages that don’t encourage excessive risk. But the major specific requirement in the proposal is that large banks set aside at least half of bonus payments to be paid out over three years. To comply with this requirement, a bank could pay their executives half of their bonus at the time it was earned, and then another third of the remaining half the next year, another third the year after that, and a final third three years after the bonus was earned. So as little as one-sixth of the total bonus could be deferred for the full three year period. This new requirement is weak compared to old partnership incentives that held executives’ wealth genuinely at risk based on the long-term consequences of their actions.

Furthermore, the rule doesn’t even ban the practice of “hedging” future compensation – so, for instance, an executive due a future deferred bonus who wanted to receive most of their money immediately could just sell the right to the deferred portion of the bonus in exchange for an up-front payment.

Finally, the specific pay requirements in the proposal cover only “executive officers,” which includes only the CEO and major division heads of the bank, not the traders or other high-level employees below them. This is much too narrow. Individuals who are not covered could include many key decision-makers with the power to incur dangerous risks for the banks.Since the release of this inadequate proposal, there has been no further action on implementing this crucial piece of financial reform. Why has the rule been so delayed and (so far) so weak? One answer is heavy lobbying. As Public Citizen noted in a 2011 report on the pay rule, companies that would be impacted by the new rules have spent hundreds of millions of dollars lobbying against its implementation, along with submitting comments in support of substantially weakening the rule. Another factor is the need for six different regulatory agencies to sign off on the rule, a process built for delay.

Today, the types of pay structures and incentives that contributed to the financial collapse are still in place. The six agencies responsible owe it to the public and the health of the financial system to take action to change them.

– Marcus Stanley and Rebecca Thiess

Originally published on

How Wall Street Avoids Paying Its Fair Share in Taxes

Like many Americans, you’ve probably just spent a good bit of time figuring out how much you owe in taxes. Most of us fill in the forms and follow the rules. But the rules are a lot more flexible for the largest U.S. corporations, and especially for the major Wall Street financial institutions and their top executives and owners. Banks and financial companies capture more than 30 percent of the nation’s corporate profits, but manage to pay only about 18 percent of corporate taxes while contributing less than 2 percent of total tax revenues, according to the Bureau of Economic Analysis and the International Monetary Fund.

What’s more, the owners and senior managers of our major financial institutions can exploit the loopholes in our individual income tax on a far greater scale than the rest of us. Below is a short guide to a few of the major ways that Wall Street avoids paying its fair share.

But I earned it in the Cayman Islands!: American corporations have developed a panoply of ways to route income through low-tax foreign subsidiaries. This practice goes well beyond the financial sector. Indeed, the latest publicized example involves a manufacturing firm, Caterpillar. Because of the inherently “placeless” nature of many financial transactions, however, financial institutions and their investors are among those in the best position to move income around in this fashion. The major Wall Street banks have thousands of subsidiaries in dozens of countries, all capable of engaging in transactions that enjoy the full guarantee of the U.S. parent company even as they take advantage of the tax or legal advantages of their foreign incorporation. Transactions in the multi-trillion dollar global derivatives market, for example, can pretty much be relocated anywhere in the world with the touch of a computer keyboard.

A way to crack down on the massive potential for tax avoidance this creates would be to simply rule that financial transactions backed up by a U.S. firm are in effect U.S. transactions and subject to U.S. tax law. Whatever international tax rules are designed to protect real manufacturing activity in other jurisdictions from inappropriate taxation should not apply to the passive income gained from financial activities that can easily be transacted from anywhere in the world. For some years U.S. tax law attempted to follow this principle, but starting in 1997 an “active financing” loophole made it much easier for multinationals to avoid taxation on financial transactions by moving profits to low-tax foreign subsidiaries. Combined with so-called “look through” provisions, these international tax loopholes mean that U.S. multinationals get to look around the world for the cheapest places to locate their earnings.

It’s not work, it’s investment!: The U.S. taxes capital gains on investments much more lightly than it taxes ordinary income. The details get complicated, but in general the profit on investments is only taxed at a maximum 15 to 20 percent rate, as opposed to a rate of almost 40 percent for high levels of ordinary income. Though its stated goal is to encourage investment and saving, a tax differential of this size can be seen as a subsidy to financial speculation, since it penalizes wage work compared to trading profits, and accrues to any investment held longer than a year, whether or not it can be shown to actually create jobs. In addition to the broad impact of the tax differential, the gap in rates creates a windfall for wealthy Wall Street executives in a position to maximize its benefits. Those who work for big hedge and private equity funds are in the very best position to do that, as they take much of their work income from the investment returns of the fund. Since they are legally permitted to classify this “carried interest” income as capital gains, they can cut their tax rates effectively in half – a windfall that costs the federal government billions of dollars a year, and means that some of the wealthiest individuals in America pay a lower tax rate on their earnings than an upper-middle-class family might.

Who, me, sales tax?: It’s easy to forget at this time of year when we’re all working on our income tax, but the sales tax is also one of the major taxes you pay each year. State and local governments take in more than $460 billion a year through sales taxes charged on everything from cars to candy bars. But Wall Street speculation isn’t charged a sales tax at all. Indeed, you’ll pay more sales tax for your next pack of gum than all the traders on Wall Street will pay for the billions of transactions they undertake every year. The non-partisan Joint Tax Committee of the U.S. Congress estimates that a Wall Street speculation tax of just three basis points – three pennies per $100 of financial instruments bought and sold in the financial markets – would raise almost $400 billion over the next decade. What’s more, such a fee would significantly discourage the kind of predatory trading strategies recently highlighted by author Michael Lewis, strategies that depend on trading thousands of times in a second in order to manipulate stock markets and extract tiny profits from each trade.

This only starts the list of ways Wall Street financial institutions and the people who run them manipulate the system and avoid paying their fair share; there are plenty more, including the use of complex financial derivatives to shelter individual income, the variety of techniques used by hedge and private equity fund partners to avoid effective IRS enforcement, and the continuing tax deductibility of corporate pay above $1 million, as long as it is sheltered under a so-called “performance incentive.” Tax time would be a good time for our elected representatives to get to work closing some of these gaps and loopholes, and leveling the playing field.

– Marcus Stanley

Originally published on

Short Memories at the House Financial Services Committee

How quickly a disturbing number of our elected representatives in Washington seem to forget.

The leaders of the House Financial Services Committee, to be more specific, will devote Tuesday morning to a hearing they have entitled “Who’s in Your Wallet? Examining How Washington Red Tape Impairs Economic Freedom.” Representatives of five major financial watchdog agencies will be quizzed on the cost of regulation – the cost, the Committee says, not only to banks and lenders, but to the country. It’s the latest in a series of similar sessions conducted over the past few years by the Financial Services Committee and the Government Oversight and Reform Committee.

Judging by the enormous amount of time they have set aside for these inquiries, you would never know we were living in a country that had recently experienced a cataclysmic loss of jobs, homes, household wealth, and economic output as a result of an era of financial deregulation, which left us with an out-of-control banking and lending industry.

Here are a few pieces of cost data that appear to have slipped off the Committee’s radar screen. First, on the impact of the financial and economic meltdown of 2008-09:

  • $13 trillion or more – projected loss of U.S. economic output, according to a January 2013 report by the Government Accountability Office.
  • 8.8 million Americans – number who lost full-time jobs, according to the Associated Press, between December 2007 and June 2009, when the country was officially in recession.
  • 42 percent – median amount of home equity lost by Americans between 2007 and 2010, according to the Federal Reserve.
  • $49,100 – average per-family loss of household wealth during those years, again according to Federal Reserve data.

The Financial Services Committee is expressing particular concern about the work of the Consumer Financial Protection Bureau, and its impact on consumer choice.

The Consumer Bureau has been a frequent Financial Services Committee target ever since it opened its doors in 2011. Unlike the Committee leadership, however, consumers overwhelmingly support the CFPB’s efforts to write and enforce rules against lending-industry tricks and traps. That agency, moreover, has actually been putting money back in the wallets of mistreated consumers. Its enforcement actions against credit card companies, debt collectors, and payday lenders have thus far delivered about $1.1 billion to nearly 10 million consumers. A recently announced CFPB mortgage servicing settlement promises another $2 billion in relief.

And there is plenty of work left to do. Abusive financial products continue to transfer billions of dollars a year from families and communities to the very worst players in the financial services world.

A few more numbers for the Committee to factor into its calculations:

  • $3.4 billion – estimated annual fees collected by triple-digit-interest payday lenders, according to a September 2013 report by the Center for Responsible Lending.
  • $3.5 billion – approximate total interest collected each year by auto-title lenders on loans of $1.6 billion, according to a study conducted by the Consumer Federation of America the Center for Responsible Lending.
  • $25.8 billion – estimated amount, according to another Center for Responsible Lending report, that consumers who bought cars in one year (2009) will ultimately pay because of kickbacks from third-party lenders to auto dealers for steering buyers into loans with higher interest rates than they could have qualified for.


Why We Need Serious Payday Loan Reform

After two years of study, the Consumer Financial Protection Bureau is moving closer to writing new rules for payday and small-dollar loans. At the Country Music Hall of Fame in in Nashville, Tennessee, last week, bureau leaders heard from a roundtable of authorities and a packed house of citizens – people with strong opinions and, in many cases, personal stories to tell. A day later, on Capitol Hill, a panel of experts answered senators’ questions about some of the same loan categories and concerns.

Witnesses at both events cited a new bureau analysis of data from more than 12 million storefront payday loans issued over a 12-month period. The report confirms the two major findings of earlier research. First, these triple-digit interest loans, promoted by lenders as a way of dealing with a short-term crisis, consistently lead borrowers into a cycle of unmanageable debt. And second, as Consumer Protection Bureau Director Richard Cordray noted, “The business model of the payday loan industry depends on people becoming stuck in these loans for the long term.” Most of the industry’s revenue, in other words, comes from keeping borrowers on the hook and getting them to pay fees that very often dwarf the amount of the original loan.

The latest data should bolster the bureau’s resolve to act. But, as the evidence makes increasingly clear, the bureau will have to resist the temptation to focus exclusively on the traditional two-to-four week loan with a lump-sum repayment. To keep pace with a fast-moving market, rulemaking must also address the payday-like problems of an array of longer-term loan products developed by an industry that is playing all the angles to get around the rules – the anticipated as well as existing ones.

Payday lending took root in the early 1990s, after the big banks and their credit-card divisions laid waste to state usury laws that had been the norm across the country. Twenty-five years later, payday lending is a huge and highly profitable industry, but a badly failed experiment when it comes to its supposed purpose of helping people in a jam.

In the Consumer Protection Bureau’s tracking, four out of five payday loans were rolled over or renewed within two weeks, and more than one in five initial loans led to a sequence of at least seven loans altogether. Among borrowers with monthly paychecks (a group that includes recipients of Social Security retirement and disability benefits), one out of five took out a loan in every month of the year!

Molly Fleming-Pierre came to Nashville from Kansas City, where she works on economic justice issues for a faith-based partnership of more than 200 Missouri congregations. Fleming-Pierre told the story of a disabled Vietnam veteran who had borrowed to help with mortgage payments and his wife’s medical expenses after she broke her ankle. The vet wound up, she testified, with “five payday loans that he spiraled in for three years,” eventually costing him $30,000 in payments and contributing to the loss of his home.

In Nashville and in Washington, the witness lists included industry representatives pleading the cause of individual liberty and professing to speak for their customers as well as themselves. But when the Pew Charitable Trusts conducted a national survey of payday borrowers, the great majority, according to Pew’s Nick Bourke, supported stronger regulation of payday lenders, with eight in 10 favoring a rule to limit payments to a small fraction of any one paycheck.

One reason for that attitude, Bourke and others suggested, is that borrowers frequently go into these loans with only a vague understanding of the costs. Stephen Reeves of the Cooperative Baptist Fellowship in Decatur, Ga., has been working on payday and small-dollar lending issues for five years. In that time, Reeves said, he has heard “again and again” from borrowers who say they have been making steady payments for months with “no idea … that they were not reducing what they owed.”

At the state level, voters and elected officials are wising up to these realities. Twenty-two states have passed laws establishing interest-rate caps or other restrictions on payday lending. But while some of these efforts have made a positive difference, the results show that the states can’t do it alone.

In response to the new regulations, the industry has been moving toward installment loans, auto-title loans and other products that often turn out to have the same key problems: high fees or rates, often camouflaged and hard to figure out, and automatic repayment mechanisms that allow lenders to extract money from borrowers’ bank accounts even if that means leaving them unable to pay rent, utilities and other basic living expenses.

The typical storefront payday loan has an effective annual interest rate of nearly 400 percent, according to Nathalie Martin of the University of New Mexico law school, who testified at Wednesday’s Senate hearing. Auto-title loan interest tends to be a little lower – in the 300-percent range, she said. But Martin added that the interest rates on installment loans, especially the types that payday lenders have developed to get around state regulation, can be far higher. “One consumer I know borrowed $100 and paid back a thousand dollars in 12 months’ time,” Martin said. “That’s 1100 percent interest.”

In some of the states most in need of new laws, moreover, legislators have had trouble summoning the will to act. Rev. Robert Bushey Jr., a pastor in Kankakee, Ill., came to Washington late last year to plead for a national response. Like other members of a delegation organized by National People’s Action, Bushey had participated in unsuccessful campaigns for legislation at the state level. “The payday lobby is very strong in the states where payday exists,” was how he summed up the obstacles.

State regulators now face the fresh challenge of responding to the rapid growth of online lending. Many of the online players operate across international as well as state borders, and some claim legal immunity on the basis of tribal relationships they have forged expressly for that purpose.

Effective regulation, then, must come from Washington. And the Consumer Protection Bureau will need to act broadly as well as decisively. An overly narrow rule would only set the stage for another era of innovation in abuse and exploitation (rather than in serving the real needs of consumers).

The industry is hoping for rules that focus on short-term loans and the “rollover” issue. But the weight of accumulating evidence points to two key problematic features that can be found in a far wider class of loans. One is the reliance on postdated checks and other mechanisms that allow the lender to take control of a borrower’s bank account. The other is the practice of issuing loans without seriously assessing a borrower’s ability to repay – to repay out of income, that is, rather than out of money needed for food, rent, fuel and other urgent priorities.

That fatal combination of loan features frames the challenge that faces Consumer Protection Bureau leaders. As they have already done in the mortgage market, to their great credit, they must now require consumer lenders to verify borrowers’ real ability to repay, and not just the lenders’ own ability to collect. Just as important, they must make it possible for borrowers to retake control of their bank accounts. Without the second requirement, lenders will never take the first one seriously.


Originally published on US