What we know about the online payday lending lawsuit Mick Mulvaney ordered the CFPB to drop

In April 2017, the Consumer Financial Protection Bureau sued four companies, Golden Valley Lending, Silver Cloud Financial, Mountain Summit Financial, and Majestic Lake Financial, for using sham tribal-sovereignty claims to collect debts on loans that violated an array of state laws as well as the federal Truth in Lending Act.

On January 18, 2018, the bureau moved to dismiss its lawsuit. After an initial statement attributing the decision to “professional career staff,” Mick Mulvaney backtracked, acknowledging his own involvement. The case took years to build, and the idea of dropping it was opposed by the “entire career enforcement staff,” National Public Radio has reported.

Here is what we know about the companies, their operations, and the allegations against them.

Golden Valley payment schedule on an $800 loan

The four companies used their websites and online ads to make tens of millions of dollars of loans at 440% – 950% annual interest. Between August and December 2013, Silver Cloud and Golden Valley originated roughly $27 million in loans and collected $44 million from consumers. A typical $800 loan called for payments totaling approximately $3,320 over ten months — the equivalent of 875.5% annual interest. Interest rates on all the loans examined by the CFPB ranged from 440% to 950%.

The Consumer Bureau sued them for engaging in unfair, deceptive, and abusive business practices by attempting to collect payments on loans that were void in whole or part under the usury and/or licensing laws of 17 states. Their loans were illegal, according to the complaint, in Arizona, Arkansas, Colorado, Connecticut, Illinois, Indiana, Kentucky, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, South Dakota, and Ohio. Golden Valley and the other companies carried on with their lending and collection activities even after the Attorneys General of several states sent cease-and-desist letters.

The defendants explained their fees in confusing ways, according to the complaint, and violated the federal Truth in Lending Act by failing to disclose annual interest-rate information on their websites or in their advertising. “Each of Defendants’ websites advertises the cost of installment loans and includes a rate of finance charge but does not disclose the annual percentage rates (APR). The ‘FAQ’ section of each of the websites answers the question ‘How much does the consumer loan cost?’ by stating: ‘Our service fee is $30 per $100 loaned. This fee is charged every two weeks on your due dates, based upon the principal amount outstanding.’”

The companies were charged with violating a Truth in Lending Act requirement that all advertising for closed-end credit state finance charges in annual percentage rate terms. In addition, according to the complaint, customer service representatives consistently failed to include that information in answers to questions raised over the phone by applicants or customers.

The four companies claimed to be protected by tribal sovereign immunity. Based on ties to a small Native American tribe in Northern California, they asserted that their loans would be “governed by applicable tribal law” regardless of where the consumer “may be situated or access this site.” The companies made this claim despite a United States Supreme Court ruling in 2014 that tribes “‘going beyond reservation boundaries’ are subject to any applicable state law.’” Numerous courts have held that when a loan is made online, the transaction is considered to have taken place wherever the consumer is located at the time.

Despite recent legal victories, states can have a hard time, without federal help, going after online lenders that break state laws. Through the use of shell companies, “lead generators,” and various legal ploys, online lenders — including the companies named in this lawsuit — have been able to keep state authorities at bay for years. Whether tribal ties really give payday loan companies a right to assert sovereign immunity remains a murky legal issue: the courts have allowed some state lawsuits to proceed while blocking others. But tribal businesses cannot invoke sovereign immunity against the United States. That’s one reason why the federal government’s ability to act is so important.

Revenues from at least one of the four lenders, and from an affiliated call center, went to RM Partners, a corporation founded by the son of Richard Moseley, Sr., who was recently convicted of federal racketeering charges. Moseley Sr., a Kansas City businessman, was found guilty in November 2017 of wire fraud, aggravated identity theft, and violations of the Truth in Lending Act as well as racketeering in connection with a payday lending scheme that charged illegally high interest rates and issued loans to people who had not authorized them. Over an eight-year period, according to the Justice Department, Moseley’s operation took advantage of more than 600,000 customers and generated an estimated $161 million in revenues. Moseley and his son spent some of that money on “luxuries including a vacation home in Colorado and Playa Del Carmen, Mexico, high-end automobiles, and country club membership dues.”

The business practices of Moseley’s operation and the four defendant companies closely resembled those of another Kansas payday lender, the race-car driver Scott Tucker, also recently convicted of federal racketeering charges. Like Golden Valley et al, the lending companies run by Tucker and his lawyer-partner Timothy Muir did business through a call center located in Overland Park, Kansas, and relied on a claim of tribal sovereign immunity, based in their case on ties to an Oklahoma tribe. The Tucker-Muir companies, featured in the Netflix documentary series “Dirty Money,” used similar contractual language to obscure their practice of defaulting customers into a many-months-long series of payments that got applied entirely to loan fees, making no dent in the balance.

Tucker and Muir were convicted in January 2018 of racketeering, wire fraud, money laundering, and violations of the Truth-In-Lending Act. Payments collected by Tucker’s businesses went into accounts at U.S. Bank, whose parent company, U.S. Bancorp, has agreed to pay $613 million in civil and criminal penalties for what the Justice Department described as a “highly inadequate” anti-money-laundering system that failed to flag these and other suspicious transactions. The Tucker-and-Muir story is another illustration of the need for action at the federal level if online payday lenders are to be stopped from evading state laws and continuing to exploit consumers.

— Jim Lardner

Payday Lenders Try To Fight Borrower Protections With Fake Comments

Predatory payday lenders do not like to be told how they can and can’t abuse consumers, and they fight protections every step of the way.

Months before the Consumer Financial Protection Bureau proposed a new rule in 2016 that threatens the profits of avaricious payday lenders across America, the industry’s leaders gathered at a posh resort in the Atlantis in the Bahamas to prepare for battle. One of the strategies they came up with was to send hundreds of thousands of comments supporting the industry to the consumer bureau’s website. But most of their comments, unlike those from the industry’s critics, would be fake. Made up.

Payday lenders recruited ghostwriters

They hired a team of three full-time writers to craft their own comments opposing the regulation. The result was over 200,000 comments on the consumer bureau’s website with personal testimonials about payday lending that seemed unique and not identical, supporting the payday lending industry. But if you dig a little deeper, you would find that many of them are not real.

Late last year, the Wall Street Journal and Quid Inc., a San Francisco firm that specializes in analyzing large collections of text, dug deeply. They examined the consumer bureau comments and found the exact same sentences with about 100 characters appeared more than 200 times across 200,000 comments. “I sometimes wondered how I would be able to pay for my high power bill, especially in the hot summer and cold winters” was a sentence found embedded in 492 comments. There were more: “Payday loans have helped me on multiple occasions when I couldn’t make an insurance payment,” and “This is my only good option for borrowing money, so I hope these rules don’t happen,” appeared 74 times and 295 times, respectively.

At the same time, the Journal conducted 120 email surveys of posting comments to the CFPB site. Four out of ten supposed letter-writers claimed they never sent the comment associated with them to the consumer bureau website. One lender told the Journal, for example, that despite a comment clearly made out in her name discussing the need for a payday loan to fix a car tire, she actually doesn’t pay for car issues since her family owns an auto shop. Consumer advocates had previously suggested something fishy was going on, and were vindicated by the report.

Another WSJ investigation has identified and analyzed thousands of fraudulent posts on other government websites such as Federal Communications Commission, Securities and Exchange Commission, Federal Energy Regulatory Commission, about issues like net neutrality rules, sale of the Chicago Stock Exchange, etc.

Payday lenders also forced borrowers to participate in their campaign

They had previously used this tactic to organize a letter-writing campaign in an attempt to influence local lawmakers, with forced signatures. The campaign collected signatures from borrowers to support legislations that would legalize predatory loans with triple-digit interest rates in the states. According to State Representative of Arizona Debbie McCune Davis, borrowers were forced to sign the letter as part of their loan application. Some did not even recall they signed the letters.

Fast forward back to the consumer bureau’s proposed payday lending rule, and some trade association websites were used to spread comments praising the industry with borrowers’ names who actually had nothing to do with it. Carla Morrison of Rhodes, Iowa, said she got a $323 payday loan and ended up owning more than $8,000 through a payday lender. “I most definitely think they should be regulated,” Morrison said, after she knew payday lenders used her name to fraudulently praise the industry. The truth is, Morrison’s comment originated from a trade association website, IssueHound and TelltheCFPB.com, which the payday-lending trade group, Community Financial Services Association of America, used to forwarded comments on payday-lending rule, with no clue these comments were fake. “I’m very disappointed, and it is not at all the outcome we expected,” said Dennis Shaul, the trade group’s CEO.

Payday lenders even tricked their own employees

In Clovis, Calif Payday lender California Check Cashing Stores asked its employees to fill out an online survey after too few customers did. In the survey, Ashley Marie Mireles, one of the employees said she received a payday loan for “car bills” to pay for patching a tire. The truth was she never paid the bill because her family owns an auto shop where she doesn’t have to pay.

Fake names, ghostwriters, and forced signatures. Payday-lenders financed a process of driving fraudulent material to stop regulation curbing the industry’s abuses. It wasn’t enough that they’re running an industry based on the immoral notion of trapping borrowers into a cycle of debt where they cannot escape, targeting the most financially vulnerable communities. Apparently, these voracious payday lenders will do anything to fight protections for consumers.

The consumer bureau has since issued a final rule this past October, with protections for borrowers going into effect in 2019.

Two different trials of payday lenders, same old story

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Payday lenders Scott Tucker and Charles Hallinan are each facing trials for doing what payday lenders do best: cheating consumers out of their hard earned paychecks.

Hallinan and Tucker have each been charged for veiling their businesses as other entities to enter the payday loan market in states where payday lending is illegal or restricted. In Hallinan’s case, he allegedly paid someone else to claim that they were the sole owner of his payday lending business. According to the Philadelphia Inquirer, “That alleged swindle, prosecutors now say, helped Hallinan escape legal exposure that could have cost him up to $10 million.” He is facing charges of racketeering, conspiracy, money laundering, and fraud–the typical charges associated with a mobster. And this is the man considered the payday industry’s pioneer.

Meanwhile, Dale Earnhardt Jr. wannabe Scott Tucker, is also accused of committing fraud by trapping customers into paying fees that were not advertised in order to illegally take more than $2 billion out of the pockets of over four million consumers. What did he do with that cash? He bought six ferraris and four porsches. Not a car or a pair of cars, but a fleet. Apparently, for Scott Tucker, “cool” cars are of more value than consumers, communities, or the law. Scott Tucker even has a hack brother who devised his own hack scam based on older brother Scott. In fact, just last week, a federal judge ruled that Joel Tucker has to pay $4 million in fines for his own misdeeds.

Looking beyond this sheer pulp fiction, these predatory practices are actual tragedies for their victims, and, unfortunately, they are not aberrations. Usury is a staple of the payday lending industry. Hallinan even admitted to what he thought was a colleague, “‘in this industry,’ he said, ‘to build a big book, you have to run afoul of the regulators.’” Plain and simple–these guys are loan sharks. Luckily, due to strong protections and federal oversight, prosecutors and regulators like the Consumer Financial Protection Bureau are working to stop these payday lending scams. But if Charles Hallinan, a pioneer in the payday loan industry, is facing racketeering charges, it just may show that the whole payday lending model is a racket.

We must protect our communities by supporting protections issued by the Consumer Bureau and state governments against this corrupt industry. Without fair rules and strong enforcement, con artists like Tucker and Hallinan will continue to make billions off the backs of poor people.

— Owen Evans

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.