Payday Lenders Have a Pal at the White House

During a recent appearance on “Meet the Press,” unofficial Trump advisor Corey Lewandowski called forthe removal of Richard Cordray as director of the Consumer Financial Protection Bureau.

His statement seemed to come out of nowhere, prompting NBC’s Chuck Todd to seek an explanation: Did Lewandowski happen to have “a client that wants” Cordray fired?

“No, no,” he insisted, “I have no clients whatsoever.”

That emphatic denial stood unchallenged for two days – until the New York Times revealed Lewandowski’s ties to Community Choice Financial, an Ohio-based company that was a major client of his former consulting firm before offering his new firm a $20,000-a-month retainer for “strategic advice and counsel.”

Community Choice is one of the country’s biggest players in the world of triple-digit-interest payday and car-title loans. Majority-owned by Diamond Castle Holdings, a private equity firm with $9 billion in assets, the company has more than 500 storefronts and does business (factoring in its online as well as physical operations) in 29 states.

The company’s CEO has described the Consumer Bureau as “the great Darth Vader” of the federal government, and the source of that ill-feeling is plain to see.

The Consumer Bureau is getting ready to issue a set of consumer-lending rules that, if they resemble a proposal put forward last year, will require verification of a borrower’s ability to repay. That simple concept runs directly counter to the business model of the payday industry,  which is to keep its customers in debt indefinitely, making payments that put little or no dent in the principal. Many people end up spending more in loan charges than they borrowed in the first place.

Like other payday lenders, Community Choice Financial has been a magnet for complaints and investigations. A California class-action lawsuit filed last year accuses the company, along with its subsidiary Buckeye CheckSmart, of violating a federal telephone-harassment law. That is also the theme of dozens of stories submitted to the Consumer Bureau’s complaint database. “This company,” says one borrower, “called my elderly parents issuing threats against me to ‘subpoena’ me to court…”

Another complainant describes a series of phone calls and “threats of criminal prosecution… on a loan I know nothing about, did not apply for or receive, and have never received any bills for.” Community Choice and its subsidiaries – companies with names like Easy Money, Cash & Go, and Quick Cash – figure in more than 650 Consumer Bureau complaints, over unexpected fees, uncredited payments, bank overdraft charges triggered by oddly-timed electronic debits, and collection efforts that continue even after a debt has been fully repaid, among other recurring issues.

Community Choice has also been a pioneer in in the subspecialty of evading state interest-rate caps. In Ohio and Texas, among other states that have tried to ban payday loans, Community Choice’s payday shops have camouflaged their predatory loans by using bank-issued prepaid cards with credit lines and overdraft charges; calling themselves mortgage lenders instead of consumer lenders; and registering as credit repair companies in order to charge separately for their supposed assistance in resolving people’s financial troubles.

The success of these legal workarounds tells us that it will be very hard for the states to address the scourge of payday lending without help. That’s why payday lenders are pushing Congress to strip the Consumer Bureau of its authority over them. And, that’s why Community Choice brands CheckSmart and Cash Express have been generous contributors to sympathetic members of Congress, and why – with the help of Lewandowski and other mouthpieces – the industry is trying to get the Trump administration to remove the Bureau’s director (even if there is no legal basis for doing so) and replace him with someone who can be depended on to leave payday lenders alone.

Lewandowski may be too embarrassed for the moment to continue raising his voice on the industry’s behalf. We can hope that’s true, at any rate. With or without his assistance, however, the industry’s campaign will continue, and the Lewandowski episode has made the stakes very clear: Will the Consumer Bureau be allowed to go on doing the job it was created to do, standing up to the financial industry’s power and insisting on basic standards of transparency and fair play? Or will some of the financial world’s fastest and loosest operators find a way to undermine this agency and keep it from cracking down on their abuses at great long last?

— Jim Lardner

Scott Tuckers payday-loan scam spotlights industry-wide lending abuses

You can learn a lot about payday lending from the story of Scott Tucker, the race car driver who stands accused, along with his attorney, of bilking 4.5 million people out of a combined $2 billion.

Their criminal indictment, announced by the U.S. Attorney’s Office for the Southern District of New York, grew out of an investigation launched by the Federal Trade Commission in 2012. Hundreds of pages of court documents from that inquiry have now been unsealed, thanks to a lawsuit filed by Public Justice on behalf of Americans for Financial Reform. As a result, we know a great deal about how Tucker’s operation worked.

People who borrowed money from his companies, which had names like Ameriloan, OneClickCash and USFastCash, were led to believe they would be responsible for repaying the principal plus a one-time finance charge of 30 percent. But as the FTC alleged and a federal court in Nevada subsequently agreed, borrowers got routed onto a much costlier path once they had signed over access to their bank accounts.

Technically, there were three repayment options. That fact, however – along with the procedure for choosing one over another – was buried in a tangle of tiny hyperlinks and check-boxes on the company’s website. And customer service representatives were explicitly told not to explain any of this clearly.

Nearly all borrowers, like it or not, were defaulted into the so-called renewal option, which began with a series of “renewal fees” costing 30 percent of the original amount borrowed. With each fee payment, borrowers would incur another renewal fee of 30 percent of the principal. Four payments later, they would wake up to discover that they had paid back 120 percent of the original amount – without putting a dent in the balance. By these means, someone who had taken out a $500 loan would end up making nearly $2,000 in payments!

The unsealed documents include transcripts of angry phone calls in which borrowers either refused to continue paying or said they couldn’t afford to do so. Tucker’s companies responded, as the transcripts show, with a variety of illegal loan collection practices, including warnings that nonpayment could lead to arrest.

Unsurprisingly, there were many complaints and at least a few investigations at the state level. For years, however, Tucker’s companies successfully hid behind an assertion of tribal sovereignty based on their false claim to have turned over ownership and management powers to tribal governments in Oklahoma. Courts in several states with strong usury laws dismissed enforcement actions against Tucker’s companies based on the sham tribal-sovereignty claim. In fact, the documents reveal, the tribes received only a tiny portion of the companies’ revenues for letting Tucker make use of their sovereignty, while Tucker kept close reins on the lending capital, staff and management.

Some aspects of the case were particular to Tucker’s companies. It is certainly not every payday lender who uses the money made by fleecing people to finance a sportscar racing career. But in much of what Tucker is alleged to have done, he was drawing on the basic payday industry playbook of loanshark-style fees and rates, bait-and-switch marketing, automatic bank withdrawals and convoluted schemes to avoid state laws.

The standard payday loan is marketed as a one-time quick fix for those facing a cash crunch. But the typical borrower ends up in a very long series of loans – 10 on average – incurring extra fees each time out. Car-title and payday installment lenders play variations on the same theme: A high proportion of their customers remain on the hook for months or even years, making payment after payment without significantly diminishing the principal. And these are the borrowers who make the loans profitable: We are talking about an industry, in other words, whose business model is to trap people in a cycle of debt.

Tucker has been put out of business – that is one big thing that sets him apart. Thanks to the efforts of the FTC and the Department of Justice, with investigative assistance from the IRS and the FBI, he faces fraud and racketeering charges carrying penalties as long as 20 years in prison.

The industry as a whole, however, is going strong across much of the country. Although these loans are prohibited or highly restricted in about a third of states, there are more payday lending storefronts in the U.S. than Starbucks and McDonalds combined. Triple-digit-interest consumer lenders are a particularly big presence in low-income communities and communities of color – communities still reeling, in many cases, from the financial crisis and aftereffects of a wave of high-cost, booby-trapped mortgage loans.

But the problem is not a hopeless one. The Consumer Financial Protection Bureau, the agency conceived by Sen. Elizabeth Warren and created by the Dodd-Frank reforms of 2010, has already drafted and begun to implement rules to guard against a resurgence of deceptive and unsustainable mortgage lending. Now it is working on rules to rein in the abusive practices of payday, car-title and payday installment lending.

The key principle should be the same: Small-dollar consumer lenders, like mortgage lenders, should be required to issue sound and straightforward loans that people can afford to repay.

Across party lines, Americans support that simple concept. By insisting on a strong ability-to-repay standard, the Consumer Financial Protection Bureau can help bring an end to a quarter-century-long wave of debt-trap.

—  Gynnie Robnett and Gabriel Hopkins

Gynnie Robnett directs the payday lending campaign at Americans for Financial Reform.

Gabriel Hopkins is the Thornton-Robb Attorney at Public Justice.

This post was originally published on US News.com.

Ferguson Report Cites Payday Lending as a Key Economic Barrier

Better to go without electricity, says Cedric Jones, than take out a payday loan to keep the lights on. Jones is one of the Ferguson, Missouri, residents quoted in Forward through Ferguson, the just-released report of a commission appointed by Governor Jay Nixon to conduct a “thorough, wide-ranging and unflinching study of the social and economic conditions that impede progress, equality and safety in the St. Louis region.”

In a document largely concerned with law enforcement, the authors identify predatory lending as a significant barrier to racial justice. (See pages 1, 49, 50, 56, 130 and 134 of the report.) “Low-income households in Missouri with limited access to credit frequently seek high-cost ‘payday’ loans to handle increasFerguson Findingsed or unexpected emergency expenditures,” they write. “These lenders, who are often the only lending option in low-income neighborhoods, charge exorbitant interest rates on their loans.”

The average annual interest rate for payday loans in Missouri was well over 400 percent in 2012, according to data cited in the report. That’s a higher rate than in any of Missouri’s eight adjacent states. As Cedric Jones told the commission, “If you borrow $500 with an installment loan from a payday loan place, the loan is 18 months. If you take it the whole 18 months, you pay back $3,000… Six times the amount… And if you’re poor to begin with you can get stuck in those things and never, never get out of it.”

A family with a net income of $20,000 could pay as much as $1,200 a year in fees and interest associated with exploitative “alternative” lending products, the report observes, pointing to research done by Federal the Reserve in 2010. The report urges action at both the state and federal level to “end predatory lending by changing repayment terms, underwriting standards, [and] collection practices and by capping the maximum APR at the rate of 36 percent.”

Choke Off Predatory Lending at the Bank Bottleneck

Over the last 15 or more years, state attorneys general and legislatures, Congress, federal regulators, consumer and faith groups and even the Pentagon have played a game of “Whack-a-Mole” against the high-cost predatory lending industry, which offers payday and other unsustainable triple-digit APR short-term loans. States have imposed interest-rate caps and strictly regulated lender practices. Military leaders pushed Congress to enact the 2006 Military Lending Act. The Federal Deposit Insurance Corp. and other regulators have taken action to end “rent-a-bank” payday lending.

Progress has been made. Fewer and fewer states throw out the welcome mat to those peddling what the Consumer Financial Protection Bureau, in a recent study, called “debt traps.”

The lenders have fought back in a variety of ways, though. If a law restricts loans made for less than 31 days, they write a 32-day package. If a law restricts high-cost closed-end credit, they redefine their product as an open-end loan. If a state bans payday lending outright, they play hard-to-find and hard-to-get.

The Internet has proven to be a very useful hiding place for these characters. One of their more successful recent stratagems has been to set up shop online, often off-shore but sometimes – in a legerdemain called “rent-a-tribe” – through a ginned-up relationship with a “sovereign” Native American tribe theoretically not subject to state laws. Often, the online lenders operate through a “lead generation” website, which functions as a kind of snare or trolling net for borrowers. The lead site then “sells” the prospective customer to the highest predatory bidder.

Now, as Pro Publica explains, regulators are focusing on the banks, which have become a “critical link” between customers and payday lenders, according to the New York Times, by providing them with a crucial new tool: direct access to bank accounts. Instead of waiting for someone to show up at a storefront with a payment, the lenders and fraudsters, too, get to simply deduct (debit) the money from the customer’s bank account, through what is called the automated clearing house (ACH) system. At a recent congressional hearing, “Mark Pearce, director of FDIC’s division of depositor and consumer protection, called the banks the “gatekeepers” to the ACH system.”

As far back as 2007, the U.S. Attorney’s office in Philadelphia took on “criminals bilking the elderly,” as the New York Times then reported, by going after a group of banks, including Wachovia (now part of Wells Fargo), that were providing merchant and ACH services to the fraudsters. Even the Office of the Comptroller of the Currency, at the time a classic captured regulator (but now under new and better management), was forced to impose penalties and, eventually, a modest consumer restitution order.

Of course, the banks learn slowly, and others did not get out of the business after Wachovia was ordered to. So, today, we welcome the intensified investigations by the U.S. Department of Justice, the CFPB, the FDIC, the OCC, the New York Department of Financial Services, the FTC, other agencies and state attorneys general to choke off illegal high-cost lending at the bank bottleneck.

— Ed Mierzwinski

Originally published on USNews.com

“Deposit Advances” Land People in the Same Bad Place as Payday Loans, Senate Is Told

When Wells Fargo turned down Annette Smith, a 69-year old widow living off of social security, for a small personal loan to get her car fixed, the bank recommended its online Deposit Advance Program. With the click of a button, she got the $500 she needed.  But the short-term, high interest loan ensnared her in a vicious years-long cycle of borrowing.

payday_loans_gr1bAs soon as Smith’s social security check hit her account, Wells automatically deducted the full amount of the advance plus a $50 service fee. That amounted to more than half her income, and with no friends or family in a position to help and the bank refusing to let her pay in installments, she had no choice but to keep taking deposit advances to make ends meet. “A few times I tried not to take an advance, but to do that, I had to let other bills go. The next month those bills were behind and harder to pay.” By the time she finally broke the cycle with the help of the California Reinvestment Coalition, she had paid nearly $3000 in fees on 63 advances over 5 years.

Smith testified at a payday-loan briefing session held by the Senate Special Committee on Aging. “I never considered going to one of those payday loan stores,” she said, “because I knew they had a reputation for charging really high interest rates. I thought that since banks were required to follow certain laws, they couldn’t do what those payday loan people were doing.”  She found out the hard way: banks have their own payday-loan style products, and they aren’t necessarily any safer than the storefront kind.

“Banks call these deposit advances, but they are designed to function just like any other payday loan.” Rebecca Borné, Senior Policy Counsel at the Center for Responsible Lending, told the committee. Deposit advance users remain in debt an average of 212 days a year, she said. On average, they “end up with 13 loans a year and spend large portions of the year in debt even as banks claim the loans are intended for occasional emergencies.”

Richard Hunt, President of the Consumer Bankers Association, said it was wrong to equate deposit advances with payday loans. Payday lenders offer their high-interest products to anyone, he explained, while banks like Wells provide deposit advances as a “service” to established customers, charging “line of credit fees” instead of interest.

Senator Joe Donnelly (D-Ind.) asked Hunt if he considered it appropriate “for some of the most respected banking names to be making 200% plus off of their customers.”

Deposit advance customers aren’t paying interest at all, Hunt insisted. But as Borné pointed out, the fees work out to the equivalent of up to 200% in annual interest, and banks that make such loans generally structure them to avoid standard interest-disclosure requirements.

Hunt was asked whether a customer with an “established relationship” might be entitled to a bank’s help in finding better ways to borrow. Banks “text people, mail people, and do everything but fly a helium balloon over their heads saying there could be a less expensive item,” Hunt replied. “At the end of the day it’s up to the consumer to choose which product they want to have.”

Wells Fargo is one of six banks that “have now joined the ranks of the payday lenders,” Borné testified. “These banks make payday loans even in states where laws clearly prohibit payday lending by non-banks…” There’s a danger, she added, that bank payday lending will spread until it becomes the norm. “We are at a tipping point,” she warned.

— Mitch Margolis

Congress Moves to Protect Service Members from High-Cost Credit Products

Thanks to provisions included in the National Defense Authorization Act for FY 2013, service members will be better protected against abusive interest rates and loan security requirements in connection with high-cost credit products.

The provisions amend the Military Lending Act (MLA) of 2007 and empower the Consumer Financial Protection Bureau and the Federal Trade Commission to enforce the MLA’s 36 percent rate cap and other important safeguards. In addition, the Department of Defense (DOD) will be required to conduct a detailed study of the abusive credit products frequently used by service members. Once that report is issued, the Department will review the effectiveness of existing MLA rules and evaluate the need for new rules to bring lenders into compliance.

The 2007 law set an inclusive rate cap of 36 percent on all loans to service members. It also barred lenders from securing loans with personal checks, debit authorizations, allotments of military wages, or car titles.

Under the DOD’s current rules, however, these protections apply only to short-term payday loans, car title loans, and tax refund anticipation loans, and not to similar loans with longer payback periods. A Consumer Federation of America Report released in June 2012 found lenders taking advantage of these definitional loopholes to offer long-term or “open-ended” variants of the loan products excluded from the DOD definition and not subject to the MLA protections.

On December 4, the Senate approved a Defense authorization bill (S. 3254) that specifically applied the 36 percent rate cap and loan security restrictions to longer-term loans and open-ended credit. The Senate bill would not have required a lengthy study and rulemaking process. Unfortunately, these provisions were not included in an earlier, House-approved bill, and were dropped from the legislation finally approved by both chambers.