Consumer Law & Policy Blog

NCLC Report: Misaligned Incentives: Why High-Rate Installment Lenders Want Borrowerrs Who Will Default

Here.  Here's the beginning of the Executive Summary:

Lenders normally want borrowers who will pay back their loans in full. This seems obvious—otherwise, won’t the lender lose money?

Yet in the high-rate installment loan market, the normal incentive to make affordable loans does not work. When loans have high interest rates, lenders may seek out and can profit from borrowers who will default in significant numbers. The gap between lender and borrower success can encourage business models that harm numerous consumers.

This report analyzes the inherently dysfunctional and harmful dynamics of high-rate installment loans. In a responsible loan market, the lenders’ profits are closely aligned to the successful repayment of the credit. Borrowers and lenders have parallel incentives and share the same goals of successful repayment. But high-rate lending can lead to asymmetrical incentives:

As long as the borrower pays long enough before defaulting, a high-rate installment loan will be profitable. If the borrower makes even half the payments on a longer-term highrate installment loan, the lender may receive sufficient cash flow to recover the amount loaned and another 50% or more, likely more than enough to turn a profit.

* * *

While the lender may have a successful experience, default causes a cascade of devastating consequences that are likely to plague the consumer for a lifetime.

 

 

 

Can Mathematical Modeling Help Create Payday Lending Regulations?

Daria Roithmayr of USC, Justin Chin, a USC law student, and Bruce Levin, an Emory biology professor, have written Cat and Mouse: A Dynamic Analysis of Predatory Payday Lending.  Here's the abstract:

Legal actors and the regulators who pursue them often engage in a co-evolutionary game of cat and mouse, as each innovates to out-compete the other. Predatory payday lenders are a prime example of this co-evolutionary arms race. Lenders have discovered increasingly creative ways to escape state regulation, like partnering with Indian tribes to claim immunity from state jurisdiction. In turn, regulators continually adapt their regulation to retarget the latest innovation. A regulator trying to keep pace with legal actors faces a tradeoff: adapting more frequently reduces the prohibited behavior, but increases wasteful innovation for both regulator and lenders, as each innovates in response to the other. In this paper, we draw from dynamic mathematical models of drug resistance to map this process and to advise regulators on how to optimize their regulatory approach. We construct a simple mathematical model using coupled differential equations to describe the arms race of innovation between regulatory strategy and the strategy of the regulated, in the context of payday lending. We conduct numerical approximations, to analyze the evolutionary pathways of regulator and lender strategy over time, and to map the tradeoff between the benefit from reducing predatory lending and the harm from having to return again and again to the drawing board to generate new regulation. We show that, contrary to intuition, a regulator should delay responding to an innovative payday lender strategy: we calculate an optimal response time that balances the need to respond slowly in order to minimize triggering repeated innovation, and the need to respond quickly to minimize the number of predatory payday lenders. We also show that a regulator that is unable to adapt quickly should weaken the strength of its innovation, in order to minimize further innovation by predatory lenders.

American Banker: The CFPB's Impact, Five Years On

Here (behind paywall). The article consists mostly of quotes and statistics.  Some excerpts (for some reason, I couldn't get the paragraph breaks to work correctly):

* * * Republican lawmakers continue to gun for the CFPB. More than 50 bills pending in Congress have sought to defund, change or somehow restrict the agency. * * * Beyond promulgating rules, the CFPB has issued more than 120 enforcement actions against a wide range of companies, including credit card issuers, banks, payday lenders and debt collectors. Banks have paid roughly 65% of the more than $11 billion in relief that has gone to consumers.

Spector & Baddour Study of Texas Debt Collection

Mary Spector of SMU and Ann Baddour of Texas Appleseed, Fair Financial Services Project, have written Collection Texas-Style: An Analysis of Consumer Collection Practices in and Out of the Courts, 67 Hastings Law Journal (2016).  Here's the abstract:

As many as forty-four percent of Texans with credit files have non-mortgage debt in collection; this is more than ten percent above the national average. The Authors provide a snapshot of collection practices employed in Texas over a two-year period following the enactment of new court rules governing the litigation of most collection cases. Using a combination of quantitative and qualitative methods, they consider data in three general categories:

(1) consumer complaints to the state and federal agencies;

(2) court outcomes over a two-year period along with related demographic data; and

(3) court observations conducted in five counties with a review of the websites for each of the courts within those counties.

The Authors find that for many Texans, consumer debt collection means threats and intimidation that disrupt their family and work lives. While they also found that the default judgment rate in consumer collection cases was slightly lower than reported in a previous study, they found that it appears to be growing, signaling that more work remains to be done. The Authors recommend a number of reform efforts that include steps to increase the quantity and quality of information provided to consumers at all stages of the collection process and to increase enforcement of existing protections. To the extent that court proceedings remain an integral part of that process, the Authors also recommend further standardization of court procedures to ensure only valid claims are raised. They also encourage courts to actively participate in efforts to ensure that the protection of consumer rights does not stop at the courthouse door.
 

Article on Department of Education's "Borrower Defense to Repayment" rule for student loans

A Washington Post story today, entitled "Did your college mislead you about job prospects? It might become far easier to have your loans forgiven," explains:

A little-known rule called Borrower Defense to Repayment, which is making its way through the regulatory process in Washington, initially was aimed at cracking down on the fraudulent behavior of for-profit colleges. But the rule released last month and set to take effect next July applies to any college or university, including traditional non-profit institutions.

The 230-page rule is based on one sentence that was written into the renewal of the Higher Education Act by Congress in the early 1990s. It allows student-loan borrowers to make a claim for “acts or omissions of an institution.” The current regulation, on the books since 1994, is pretty ambiguous about what kind of acts or omissions rise to the level of the federal government discharging loans.

Few paid attention to the rule, or took advantage of it, until the for-profit chain of Corinthian Colleges collapsed last year and students said their federal loans should be dismissed because they had been defrauded with Corinthian’s false job-placement claims. Since then, the department has been inundated with more than 25,000 claims, mostly from former Corinthian students (the department has discharged about $73 million in loans for about 4,000 students).

During that process, it became clear that the 1990s-era rule wasn’t detailed enough. That’s why new regulations are coming.

The full story is here.

NCRC Study Finds Mortgage Discrimination Continues

Here.  From the Executive Summary:

NCRC has found an extensive mortgage lending imbalance in St. Louis, with mortgage credit distribution heavily swayed by income levels and the racial makeup of neighborhoods. These trends are noteworthy, especially within the City of St. Louis. While median family income is a crucial factor, lending is concentrated in majority white neighborhoods and scarce in majority African American neighborhoods. * * *

* * * In the City of St. Louis itself, the racial composition of the neighborhood is a strong predictor of mortgage activity, becoming nearly as important as neighborhood income in its predictive capability. As the percentage of white residents increases, so does the amount of mortgage lending. Conversely, a higher proportion of African American residents correlates with fewer mortgage loan originations. * * *

The City of St. Louis and its inner ring suburbs like Ferguson show strong indications of hypersegregation. There are many census tracts in which the population is 75-98 percent African American – concentrated clusters of segregated neighborhoods. Within these areas less than one percent of homes received a home purchase loan for the 2012-2014 period. This lack of lending is not fully explained by differences of income, meaning that credit is flowing more to neighborhoods with higher percentages of white residents with the same income profile.

The study also found problems in the Milwaukee and Minneapolis areas.

What Does the Republican Platform Say About Consumer Protection?

The full platform is here.  Here are excerpts on consumer protection issues:

The Republican vision for American banking calls for establishing transparent, efficient markets where consumers can obtain loans they need at reasonable rates based on market conditions. Unfortunately, in response to the financial institutions crisis of 2008-2009, the Democratic-controlled Congress enacted the Wall Street Reform and Consumer Protection Act, otherwise known as Dodd-Frank. They did not let the crisis go to waste but used it as an excuse to establish unprecedented government control over the nation’s financial markets. The consequences have been bad for everyone except federal regulators.

Rather than address the cause of the crisis — the government’s own housing policies — the new law extended government control over the economy by creating new unaccountable bureaucracies. Predictably, central planning of our financial sector has not created jobs, it has killed them. It has not limited risks, it has created more. It has not encouraged economic growth, it has shackled it.

Since the enactment of Dodd-Frank, the number of community banks has significantly declined, and the cost and complexity of complying with the law has created impediments to the remaining banks’ ability to support the customers they serve. From 13,000 community banks in 1985, only 1,900 remain. * * *

The worst of Dodd-Frank is the Consumer Financial Protection Bureau, deliberately designed to be a rogue agency. It answers to neither Congress nor the executive, has its own guaranteed funding outside the appropriations process, and uses its slush fund to steer settlements to politically favored groups.

Its Director has dictatorial powers unique in the American Republic. Its regulatory harassment of local and regional banks, the source of most home mortgages and small business loans, advantages big banks and makes it harder for Americans to buy a home. Its one-size-fits-all approach to every issue threatens the diversity of the country’s financial system and would leave us with just a few enormous institutions, as in many European countries.

If the Bureau is not abolished, it should be subjected to congressional appropriation. In that way, consumer protection in the financial markets can be advanced through measures that are both effective and constitutional. Any settlements arising from statutory violations by financial institutions must be used to make whole the harmed consumers, with any remaining proceeds given to the general Treasury. Diversion of settlement funds to politically connected parties should be a criminal offense. * * *

Because regulations are just another tax on the consumers, Congress should consider a regulatory budget that would cap the costs federal agencies could impose on the economy in any given year.

Feds not on track to meet 2025 fuel efficiency goals

This article by Steven Mufson explains that "the fuel efficiency standards championed by President Obama in 2012 will fall short of the 54.5-miles-per-gallon 2025 target the administration set because consumers are buying more pickup trucks, vans and sports utility vehicles than expected, according to a new technical assessment report by the Environmental Protection Agency and the National Highway Traffic Safety Administration." The report noted that there are  "no economic or technological barrier preventing automakers from continuing to boost fuel efficiency and to hit the standards for vehicles based on their size and footprints," and that, in fact, car makers are more than complying with standards for producing fuel efficient cars. 

Number of FDA "orphan drug" designations rising dramatically

This short article by Gayatri Rao, the Food and Drug Administration's director of Orphan Products Development, explains that, in recent years, drug companies have been filing many more "orphan drug" applications than they used to. Orphan drugs are drugs aimed at treating people with rare diseases. Drug companies sometimes say that it's too costly for them to develop orphan drugs given the small potential market for some orphan drugs. Among other things, Rao discusses incentives federal law provides for companies to develop orphan drugs -- such as tax credits, a post-approval period of market exclusivity, and, most recently, waiver of "user fees" for company submissions that apply to regular drug applications.

Will the CFPB Also Release a Debt Collection Study on July 28?

by Jeff Sovern

As we have previously noted, the CFPB has scheduled a July 28 debt collection field hearing, and could announce the beginning of the SBREFA process, leading to a rule-making, that day.  NCLC's April Kuehnhoff speculates that the Bureau will also release the results of its debt collection studies then.  The Bureau's arbitration study substantially added to what we know about that subject, and it would be great if the Bureau, which has been looking into debt collection for some time, did the same for debt collection.  Given how pervasive debt collection is in our country--one third of Americans are reported to have debts in collection--the more we can learn about debt collection, the better-informed policy-making and those of us who study consumer law can be.