limitations are not freedoms
Studies pertaining to the industry continue to surface while validating the industry as a viable option for households in a temporary bind. While the CRL and other consumer advocate groups will dissect and apply information to fit their views, there are data to support claims in favor of payday lending which negate many of the claims from opposition. To their credit, the CRL doesn’t discriminate with their attacks in the name of consumer protection, and instead they seem to make it a point to attack every form of credit available.
Study: Phantom Demand: Short-term due date generates need for repeat payday loans, accounting for 76% of total volume conducted by the Center For Responsible Lending
Claim: The CRL makes blanketed and gross accusations claiming: "The borrower needs only a source of income—usually from a job or government benefits such as Social Security—and a checking account to qualify. No credit check is performed, nor greater assessment of ability to repay, such as a review of the borrower’s other obligations.”
Truth: This statement is false for a number of reasons. Although the industry’s trade association, the Community Financial Services Association of America sets guidelines and best practices, the CRL is assuming that the thousands of different payday lending entities operate using the exact same procedures and underwriting. Payday lending institutions are also governed by their respective states in which states such as Michigan where (by law) lenders must check a database to see if a potential customer has any loans outstanding prior to approval. Lenders are therefore assessing ability to pay and are also limited to loaning no more than $600 to an individual every 31 days.
Claim: “The payday lending industry reports that 90 percent or more of loans are repaid. However, after repaying their loan, many borrowers find they cannot meet their other expenses with the remainder of their income. Faced with this shortfall, borrowers take out a new loan soon after they pay back the old one, trying to fill the hole in their family budget that was created by repaying the previous loan.”
Truth: Again, the state in which the company operates determines whether or not a customer has to pay off or is able to pay the balance down with a minimum payment. In addition, one of the best practices created the trade association insists that all members allow their clients with the inability to pay to enter into an interest free installment agreement. It is pretty evident that the CRL had already made up its mind about the outcome of their study before it was even initiated and completed.
Claim: “Since payday loans are due on the borrower’s next payday, we would expect to observe a preponderance of very short loan terms (for example, of less than seven days), consistent with the explanation that the borrower ran out of money a few days before their next paycheck because they faced an unexpected financial shortfall.”
Truth: It is likely that this statement was made with no consideration of individual state laws at all. Missouri, for example, cannot legally issue a loan for terms less than 14 days in addition to Indiana and Alaska. Every state has specific requirements for the length of the loan contract and therefore should be no surprise that the average loan may be longer than 7 days.
Claim: “As the experiences in 15 states and the District of Columbia show, a 36 percent APR rate cap protects families from short-term balloon payment loans, encouraging installment products where a borrower can repay their debt at a more manageable pace.”
Truth: Yes, a 36 percent APR has been applied in several states and unfortunately, the effect wasn’t the protection of borrowers from short-term balloon payments, but instead it lead to the complete abolition of short-term credit in those states.
Study: Payday Holiday: How Households Fare after Payday Credit Bans conducted by staff from the Federal Reserve Bank of New York
Findings: The study tested the three primary claims that are frequently made by the CRL. These claims include: payday loans are usurious, payday loans target a particular demographic, and payday loan customers are repeat borrowers. By doing the above, they were essentially testing the debt trap hypothesis. Georgia and North Carolina were in the process of banning payday lending shortly before the study and the household financial problems of those states were compared to those of states in which payday loans were already banned. Most of the findings from the study contradict the debt trap hypothesis, suggesting that Georgia bounced more checks, complained more about lenders and debt collectors in addition to being more likely to file chapter 7 bankruptcy after the ban.
Study: An Analysis of Consumers’ Use of Payday Loans conducted by the George Washington School of Business
Findings: This study seeks to determine whether or not payday loan customers know what they are doing when they use product in addition to whether or not they understand the costs and available alternatives. This study concluded that most payday loan customers used the product for unexpected and urgent expenses and also considered their options before-hand. There is also evidence that although some customers use the loans frequently, most customers use them as they were intended, for short-term financing. In addition, most customers felt that payday lenders provide a useful product/service.
Study: Payday Lenders: Heroes or Villains in 2008 conducted by the Graduate School of Business of the University of Chicago
Findings: Natural disasters and positive and negative welfare measures are used to evaluate the strength of lifestyle patterns during distress as well as the permanent consequences to distress. The study finds that communities with payday lenders show greater resiliency when faced with natural disasters.
Study: An Experimental Analysis of the Demand for Payday Loans
Findings: This study was conducted to determine the effect that payday loans have on an individuals’ ability to effectively manage financial setbacks. The study found that where payday loans exist, a higher percentage of subjects survived financially over a 30 month period. Subjects had access to payday loans as well as overdrafts and there was nearly a 10% difference in survival rate between subjects who used payday loans versus those with no access to them.
The Consumer Financial Protection Bureau has encouraged consumers to submit feedback and complaints relevant to financial institutions and individual products. The complaint data compilation includes: credit reporting, credit cards, student loans, mortgages, savings accounts, checking accounts, and other bank services and consumer loans. The Consumer Financial Protection Bureau is now sharing all complaint data with state regulatory agencies. The CFPB is doing so in a effort to make complaint filing a easier process for the consumer. This process will hopefully keep individuals from having to file multiple complaints with several agencies in the pursuit of resolution. Click here to visit the CFPB website for additional information on the complaint filing process.
The 112th Congress has introduced H.R.6139, also known as the Consumer Credit Access, Innovation, and Modernization Act, which would create a federal charter for national, non-traditional financial institutions that extend credit for 30 days or longer. The bill recognizes that individuals of all incomes use non-bank institutions for their short term and/or small dollar credit needs. In addition, the bill also recognizes that the FDIC and banking institutions have not been able to sufficiently meet the short-term credit needs of consumers. The establishment of a federal charter would essentially legitimize non-bank, non-traditional financial institutions and construct uniform federal guidelines for all consumer lenders to abide.
The Circuit Court of Missouri has ruled in favor of the plaintiffs in a recent lawsuit filed by citizens against the Secretary of State concerning the language which was approved for the ballot initiative. The ballot initiative, which would have capped the annual percentage rate on all consumer loans in Missouri to 36%, proposed language that would not specify the true impact of the law, nor would it have stated the annual percentage rate on the actual ballot. Missouri citizens argued that the language was deceptive and misleading.
Consumers have coined this upcoming Saturday, November 5th as "Bank Transfer Day." In an effort to show banking institutions that the people hold the power and, in a sense, punish banks for their greed, the plan is to transfer money from big banks and into a local credit union or bank. Although the movement is independent of the Wall Street protests, it has gained much popularity within those groups and has even received a definition on Wikipedia. The movement is still scheduled to take place even though the big banks have announced the cancellation of their debit card fees.
Several weeks ago we caught wind of Bank of America's plan to cut up to 10,000 jobs to make up for lost fees from overdrafts, merchants, credit card interest and more. Although it may not have been a shock to the public, it was still unwanted news symbolizing more economic chaos and uncertainty. Shortly after, we learned that Warren Buffet had agreed to invest $5 billion into Bank of America to soften the blow of whatever anticipated financial woes were to come for them. Now, Bank of America is instituting a $5 monthly service fee for debit card users. It's certainly not news that the debit card is one of the most used modern day conveniences, but banks may be forcing customers to choose between convenience and disposable income. While $5 doesn't sound that hefty, when you think of it as $60 a year to spend your own money, it sounds more undesireable. But the jury may still be out as to whether consumers will view this new $5 fee as just the cost of services rendered or whether it's an act to be outraged by.
The Missouri office of the Secretary of State has approved for a ballot initiative for the 2012 elections which will significantly reduce the amount of interest that alternative lenders may charge. So much, that lenders will be forced out of business in Missouri if passed. While the Missourians for Responsible Living may have good intentions, they may also be missing the bigger picture; loss of credit availability, demolition of alternative finance in Missouri, elimination of approximately 10,000 Missouri jobs, disregard for consumer education and full disclosure, and the subsequent economic devastation. Two lawsuits have already arisen from this initiative.
Richard Cordray has been chosen by President Obama to head the new Consumer Financial Protection Bureau. Cordray is the former Attorney General for the state of Ohio and was originally due to be confirmed this month. However, the hearing has been postponed until September, when Congress returns from a break. There is a chance that Cordrays confirmation will be blocked if all Republican demands are not met.
Even as the CFBP has launched on July 21st, concerns are still prominent and the agency continues to be met with resistance - even from Capitol Hill. The House voted on moving forward with H.R. 1315 which would convert the CFPB's one person leadership into a five person authority. The assumed goal is to minimize the power of the agency, and many Democrats believe that it is an effort to reduce overall financial reform. We'll have to keep a close eye on what surfaces over the next couple of months as the agency contacts and communicates with the financial institutions in which it now has jurisdiction.
The Consumer Financial Protection Bureau initiated a timeline of occurrences, events and deadlines relating to the development of the organization. However, there has been a void in that timeline for the past five months which seemingly represents a halt in progress as no formal director has been named. Although the bureau's implementation team is large, there are still questions as to whether or not there will be an adequate launch on July 21. One thing is certain...the bureau will be limited without a confirmed director.
The Weldon Cooper Center for Public Service is a division of the University of Virginia which focuses primarily on demographics and workforce statistics. The organization's study on the use of alternative financial services concluded that steps toward economic security should include improved financial literacy for individuals and families in addition to the development of short-term loan products through mainstream institutions but doesn't mention whether or not alternative services facilities should remain in existence to continue to meet the needs of consummers.
The FDIC held a meeting on the state of economic inclusion and the lack of availability of financial products for low to moderate income families. While federal regulatory forces recognize the need to expand and modify financial services to meet the ever-changing needs of our communities, there's still a lack of resouces available in LMI communities. The FDIC challenged communnity banks to alleviate the dilemma by asking them to come up with tailored products that the underbanked, unbanked and banking challenged would be able to take advantage of to improve their overall financial wellbeing. The FDIC also recognized that access to capital may prove to be an obstacle for community banks, limiting the availability of loan resources. Check out the FDIC webcast for more details.
The truth is that lobbying is a necessary evil whether or not we agree with it or how it's done. We all have special interests even if we're not appealing to politicians to lean more towards our point of view. The unfortunate reality is that many groups that pick apart other special interest groups for lobbying are themselves very guilty of doing the same. Take a look at how much the Wall Street Journal says is being spent by big banks.