Consumer Law & Policy Blog

NYT: Credit Card Buyer Beware

The federal agencies that are supposed to regulate the banking and credit card industries have failed utterly to keep pace with deceptive and unfair practices that have become shamefully standard in the business. As a consequence many hard-working Americans who pay their bills are mired in debt — and in danger of losing whatever savings they have, and perhaps their homes. Congress, which sat on its hands while the problem got worse and worse, needs to rein in this sometimes predatory industry.

Read more of this editorial from yesterday's New York Times.

Washington Post Editorializes In Favor Of Limits On Payday Lending

Check out this editorial in today's Washington Post in favor of state-law limits on payday lenders.  The editorial specifically endorses efforts in the District of Columbia Council to limit interest rates on payday lenders in the District.

Ronald Mann and Jim Hawkins on Payday Lending

In the article, Just Until Payday, 54 UCLA L. Rev. 855, 886, 905, 907 (2007) , Ronald J. Mann & Jim Hawkins offer a particularly interesting take on bans on payday lending.  They also suggest a different form of regulation.  Here's a quote:

* * * The core problem [with a ban] is that bans are unlikely to keep consumers from borrowing.  Rather, the evidence suggests that bans may well cause consumers to borrow from sources that provide products that are less beneficial—products that consumers are more likely to avoid in markets that tolerate payday lending.

* * *

The best solution, from our perspective, is to adopt a simple disclosure scheme, with which reputable lenders readily can comply.  We would require lenders to display in a prominent way the fee per $100 borrowed.  This disclosure requirement solves the problems identified [earlier in the paper]:  It (1) tracks with the survey data that customers use their actual cost to make decisions and not an interest percentage; (2) eliminates the confusion caused by different interest rates for different time periods; (3) ensures borrowers obtain the information up front at little cost; and (4) encourages compliance by allowing lenders to avoid stating misleadingly high APRs.

* * *

[The article also suggests that the industry would be improved if it were dominated by a few large institutions] The most obvious benefit of participation by large institutions is that they have much more to lose from noncompliance [with regulations].  It also is much easier to monitor a small number of large chains than to monitor thousands of separately operated providers.  In addition, large institutions that fail to develop policies that ensure compliance with regulations can be force to pay extremely large fines, in an amount adequate to deter misconduct.

Another Form of Predatory Lending?

Saturday's Times had an article headlined "Enticing Ad, Little Cash And Then a Lot of Regret," about what Steve Cox, spokesperson for the Council of the Better Business Bureaus called "another form of predatory lending" that "generates more complaints than any other business."  The practice involves businesses that offer computers to consumers with poor credit and then deliver the computers late (or never) while deducting payments over time directly from the consumer's bank account and charging far more than the computer is worth.

Securitization of Loans

Chris Peterson has previously blogged here about securitization of subprime and predatory loans (that is, the packaging and sale of the right to receive payments on such loans); he's also published a longer treatment of the issue in the Cardozo Law Review available here.  Professors Engel and McCoy, who are also estimable commentators on the problem of predatory lending have now weighed in on the problems caused by securitization as well.  See Kathleen C. Engel & Patricia A. McCoy, Turning a Blind Eye: Wall Street Finance of Predatory Lending, 75 Fordham L. Rev. 2039, 2041 (2007) available here.  Here's a quote:

* * * [S]ecuritization inflicts negative internalities on borrowers in at least four ways.  First, securitization funds small, thinly capitalized lenders and brokers, thus enabling them to enter the subprime market.  These originators are more prone to commit loan abuses because they are less heavily regulation, have reduced reputational risk, and operate with low capital, helping to make them judgment-proof.  Second, securitization dilutes incentives by lenders and brokers to avoid making loans with excessive default risk by allowing them to shift that risk to the secondary market, which has other ways to protect itself.  Third, securitization denies injured borrowers legal recourse against assignees by triggering the holder-in-due-course rule and impeding-outs.  Lastly, securitization drives up the price of subprime loans because investors demand a lemons premium for investing in subprime mortgage-backed securities.

Professors McCoy & Engle propose a number of reforms, including increased due diligence requirements and assignee liability for “(1) common law tort claims, such as fraud and improvident lending; (2) contract claims such as unconscionability; [and] (3) claims under state and local anti-predatory lending laws” but not under state UDAP statutes.  By contrast, advocates of securitization claim it enables lenders to extend loans to more borrowers at reduced rates because it reduces lender risks. 

"Maxed Out" Now Available for Purchase or Rental

We have previously discussed the critically-acclaimed movie "Maxed Out" here and here.  "Maxed Out" surveys the state of consumer debt in this country in a way that you won't easily forget.  It is now available for purchase for $15 to $20 from folks like Amazon and for rental from the usual mega-renters like Neflix and Blockbuster.  Worth viewing.

A Sermon on Payday Lending

The District of Columbia Council, our local equivalent of a state legislature, is considering payday lending legislation.  Earlier today, on the WAMU radio station, the Reverend Graylan Scott Hagler of the Plymouth Congregational United Church of Christ delivered some passionate commentary on the evils of payday lending and the need for legislation in the District.  It's worth a listen.   (On a related note, proposed payday lending legislation has also recently been introduced at the federal level.)

Another Form of Equity Stripping

Tuesday's New York Times had an article, "New Scheme Preys on Desperate Homeowners".  A quote: 

With the housing market in decline, financial predators are finding yet another way to take advantage of people who fall behind on their payments.

The schemes take various forms and often involve promises to distressed homeowners of cash upfront, free monthly rent and a chance to retain their houses in the long run. But in the process, someone else takes over the deed, borrows as much as possible against the value of the house and pockets the cash. And, almost always, the homeowners still end up losing their homes.

NCLC Reports on Big Name Banks' Support of Payday Lenders

Over at the Consumerist you'll find this nice discussion of a new National Consumer Law Center report on the relationship between some of the biggest banks and your friendly local payday lender.  Yes, Bank of America, Wells Fargo, JP Morgan, and others are bankrolling the payday lending industry to the tune of hundreds of millions of dollars in lines of credit. (But they don't sell payday loans at their local branch banks, do they?).  The Consumerist characterizes what it learned from NCLC's report this way:  "Kinda like finding out the local hardware store owner sells crack on the side."

Oregon Curbs Payday Lenders

    by Scott Nelson

   Oregon Governor Ted Kulongoski yesterday signed into law a package of bills designed to protect consumers against abuses by the payday lending industry and other short-term lenders that target vulnerable borrowers with high-interest loans.  Together, the new laws will, among other things, cap interest rates, limit rollovers of short-term loans, and attempt to regulate internet transactions.  Importantly, the interest rate caps are not limited to specific loan products -- which would facilitate evasion as lenders responded by modifying their loans to take them outside the laws' restrictions -- but apply to all consumer finance loans involving amounts less than $50,000.

  The new laws should significantly ease the triple-digit interest rates charged by payday lenders and their cousins, auto title lenders.  Indeed, payday lenders say the new laws will drive them out of the state altogether.  Whether that is so remains to be seen, but the laws still allow payday lenders, through a combination of interest rates and "origination fees," to charge effective annual interest rates of well over 150% on one-month loans.

Background of the New Laws

  Oregon, like many other states, had effectively repealed its usury laws in 1981, when a law imposing an interest rate cap of 36% on consumer loans was repealed.  In recent years, the payday lending industry had taken full advantage, charging interest rates that often exceeded 500% annually.  One frequently cited measure of the industry's penetration of the Oregon market is that the number of payday lenders operating in the state substantially exceeds the number of McDonald's franchises (though this is true in most other states as well, according to a researcher at California State University - Northridge).