Understanding the SAFE Act

Payday lenders may seem to be everywhere, but they were not always there. The first payday stores opened in the early 1990s – a byproduct of the same anything-goes deregulatory mania that led to a wave of booby-trapped mortgages and the financial and economic meltdown of 2008.

Almost as soon as they appeared on the scene, faith leaders and consumer and civil rights advocates called for rules to rein in the abuses of an industry whose business model is to advertise a form of “help” that consistently makes things worse, trapping people in long-term high-cost debt and imposing more economic distress on communities.

After a quarter of a century, these efforts are making progress. Fourteen states have meaningful regulations and the first nationwide rules are being developed by the Consumer Financial Protection Bureau (CFPB), the new agency established after the 2008 crisis to bring basic standards of fairness to the financial marketplace.

But the industry is also pressing ahead, employing new loan models and a battery of technological and legal ploys intended to skirt the rules, both existing and anticipated.

Senator Jeff Merkley D-Ore.), a longtime champion of consumer rights, has introduced legislation to address some of these evasive maneuvers. His Stopping Abuse and Fraud in Electronic Lending (SAFE) Act would make it easier to uphold the interest-rate caps and other measures taken by the states. Merkley’s bill would also bolster the effectiveness of the Consumer Bureau’s efforts to require payday-style consumer lenders to do what other lenders do: verify a borrower’s ability to repay before a loan can be issued.

One big problem, for the CFPB as well as the states, is the fact that more and more payday lenders now do business online. Some companies hide from view, using anonymous domain registrations and websites with no physical contact information. Others, while describing themselves as payday lenders, turn out to be “lead generators” who collect personal information and then auction it off to lenders and other marketers. It is very hard to take legal action against criminals who have encased themselves in online camouflage. It gets even harder when they claim to be doing business from overseas or from Native American reservations in order to assert tribal-sovereignty privileges.

Online or out on the street, the basic formula is the same. These lenders charge triple-digit interest rates (nearly 400% on average) and are prepared to issue a loan as long as they can gain access to someone’s bank account – regardless of whether the borrower can actually afford the loan. Their standard, in other words, is the ability to collect, not to repay. In fact, while the industry promotes its products as short-term loans, most of its profits come from people who remain on the hook for months at a stretch and often end up paying more in fees than they borrowed in the first place.

Those who borrow online face special perils. They are often required to provide personal and financial information in loan applications – data that may be bought and sold by unregulated lead generators, loan brokers, lenders, and others. In some cases, this information is used to defraud people two or three times over.

Senator Merkley’s bill seeks to address these problems in three ways – by helping consumers regain control of their own bank accounts; by establishing standards of transparency for online lenders; and by cracking down on lead generators and other third-party predators. More specifically, the SAFE Act would require banks and other lenders to abide by the rules of the states where they do business; prevent third parties from using remotely created checks (RCCs) to withdraw money without an account-holder’s express pre-authorization; prohibit overdraft fees on prepaid cards issued by payday lenders in order to gain access to consumers’ funds and pile on extra charges; and ban lead generators and anonymous lending.

The great majority of Americans, regardless of political party, favor strong action to end the scourge of abusive payday, car-title, and other high-cost, debt-trap consumer loans. By supporting the SAFE Act and standing up for the complementary efforts of the states and the CFPB, members of Congress can heed this loud, bipartisan call from their constituents.

— Gynnie Robnett

Robnett is Payday Campaign Director at Americans for Financial Reform. This piece was originally published on The Hill’s Congress Blog.

Ho! Ho! Ho! A Season of Opportunity for Payday Lenders

The holidays are upon us, and for many this is a season of financial stress and strain as well as joy – a time when the need for an extra couple of hundred dollars can seem especially acute.

For payday, title loan, and auto title lenders, that makes the holidays a season of opportunity. And many of these lenders don’t just make an extra push at the end of the year; they actually insert a holiday theme into their advertising!

Cash Title Exchange, a Mississippi-based lender, sent out a colorful direct-mail piece promising “the cash you need this holiday season” and featuring a smiling Santa Claus with an armful of presents. “Even Santa needs help,” the ad pointed out.

Santa was also a co-star in a TV spot for TitleMax, based in Savannah, Georgia: “Come to TitleMax now for cold hard cash,” says the cheery announcer. “Your car title is your credit – Ho! Ho! Ho!”

What such companies don’t advertise, and what many borrowers don’t know, is exactly how much money they will ultimately have to pay for the relatively small sum they receive immediately. Because such loans typically carry fees that work out to the equivalent of 300 to 500 percent in annual interest, many borrowers are forced to take out a long string of loans to cover payments on the original one. Their loan fees often end up dwarfing the amount of money they borrowed in the first place.

Targeting borrowers during the holiday season hits many when they are feeling the most vulnerable. And ads aren’t just splashed in public places, they are sent out in focused mass mailings to people who are particularly likely to respond—the elderly or those with low annual incomes.

While loans like these may be marketed as a way to deal with a one-time emergency or secure a little extra holiday cash, they routinely lead people into a cycle of long-term debt. The Consumer Financial Protection Bureau, in its research on the small-dollar loan market, has found that four out of five payday loans end up being rolled over or renewed within two weeks, with half of those becoming part of a sequence of 10 or more loans. And that is exactly the outcome these lenders are counting on: Getting people to borrow repeatedly, paying fee after fee, is their business model.

In an enforcement action against ACE Cash Express, the bureau exposed the company for using a variety of illegal tactics, including false threats of criminal prosecution, to bully its borrowers into repeatedly taking out new loans to cover the cost of old ones. A graphic from the company’s own training manual spelled out its preferred method of entrapment.

In 2015, the Consumer Financial Protection Bureau is widely expected to announce a set of proposed consumer protection rules that could change this market for the better. This should be welcome holiday news: Most Americans have a negative opinion of payday lenders. (65 percent hold an unfavorable view, versus only 15 percent with a favorable view, according to a recent national survey.)

Payday lenders are hurting Americans; but the industry has been using political contributions to safeguard its profit stream, and Congress has so far been unwilling to regulate.

A recent report by Americans for Financial Reform sheds light on exactly how much this industry is spending to exercise influence in Washington. In the 2014 election cycle, payday, auto title and installment lenders, along with other entities that play a role in their operations, reported more than $13 million in political spending, with much of that money coming from trade associations that represent the industry in Washington. Major spenders also include some of the trade associations’ big corporate members — the actual payday lenders themselves. Cash America, a company found by the Consumer Financial Protection Bureau to be using illegal debt collection tactics and overcharging servicemembers and their families, spent over $1.7 million in the 2014 cycle on lobbying and campaign contributions.

But the next holiday season could be a bit brighter. The bureau could make lenders verify that loans are affordable in light of a borrower’s income and expenses; reduce the payday debt trap from the typical 200 days a year to no more than 90; and put borrowers back in control of their own bank accounts. The holidays are a time for joy and giving, and as the residents of Whoville know, there is no room for the Grinch.

— Rebecca Thiess

Originally published in 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.