Category: Payday & Title Lending

  • The New Usury: The Ability-to-Repay Revolution in Consumer Finance

    Posted by

    Adam Levitin

    I have a new article out in the George Washington Law Review, entitled The New Usury: The Ability-to-Repay Revolution in Consumer Finance. The abstract is below:

    American consumer credit regulation is in the midst of a doctrinal revolution. Usury laws, for centuries the mainstay of consumer credit regulation, have been repealed, preempted, or otherwise undermined. At the same time, changes in the structure of the consumer credit marketplace have weakened the traditional alignment of lender and borrower interests. As a result, lenders cannot be relied upon to avoid making excessively risky loans out of their own self-interest.

    Two new doctrinal approaches have emerged piecemeal to fill the regulatory gap created by the erosion of usury laws and lenders’ self-interested restraint: a revived unconscionability doctrine and ability-to-repay requirements. Some courts have held loan contracts unconscionable based on excessive price terms, even if the loan does not violate the applicable usury law. Separately, for many types of credit products, lenders are now required to evaluate the borrower’s repayment capacity and to lend only within such capacity. The nature of these ability-to-repay requirements varies considerably, however, by product and jurisdiction. This Article terms these doctrinal developments collectively as the “New Usury.”

    The New Usury represents a shift from traditional usury law’s bright-line rules to fuzzier standards like unconscionability and ability-to-repay. Although there are benefits to this approach, it has developed in a fragmented and haphazard manner. Drawing on the lessons from the New Usury, this Article calls for a more comprehensive and coherent approach to consumer credit price regulation through a federal ability-to-repay requirement for all consumer credit products coupled with product-specific regulatory safe harbors, a combination that offers the best balance of functional consumer protection and business certainty.

     

  • The New Usury

    Posted by

    Adam Levitin

    I have a new paper up on SSRN. It's called The New Usury: The Ability-to-Repay Revolution in Consumer Finance. It's a paper that's been percolating a while–some folks might remember seeing me present it (virtually) at the 2020 Consumer Law Scholars Conference, right as the pandemic was breaking out. Here's the abstract:

    Consumer credit regulation is in the midst of a doctrinal revolution. Usury laws, for centuries the mainstay of consumer credit regulation, have been repealed, preempted, or otherwise undermined. At the same time, changes in the structure of the consumer credit marketplace have weakened the traditional alignment of lender and borrower interests. As a result, lenders cannot be relied upon not to make excessively risky loans out of their own self-interest.

    Two new doctrinal approaches have emerged piecemeal to fill the regulatory gap created by the erosion of usury laws and lenders’ self-interested restraint: a revived unconscionability doctrine and ability-to-repay requirements. Some courts have held loan contracts unconscionable based on excessive price terms, even if the loan does not violate the applicable usury law. Separately, for many types of credit products, lenders are now required to evaluate the borrower’s repayment capacity and to lend only within such capacity. The nature of these ability-to-repay requirements varies considerably, however, by product and jurisdiction. This Article collectively terms these doctrinal developments the “New Usury.”

    The New Usury represents a shift from traditional usury law’s bright-line rules to fuzzier standards like unconscionability and ability-to-repay. While there are benefits to this approach, it has developed in a fragmented and haphazard manner. Drawing on the lessons from the New Usury, this Article calls for a more comprehensive and coherent approach to consumer credit price regulation through a federal ability-to-repay requirement for all consumer credit products coupled with product-specific regulatory safe harbors, a combination that offers the greatest functional consumer protection and business certainty.

  • The Financial Inclusion Trilemma

    Posted by

    Adam Levitin

    I have a new draft article up on SSRN. It's called The Financial Inclusion Trilemma. The abstract is below. 

    The challenge of financial inclusion is among the most intractable policy problems in banking. Despite being the world’s wealthiest economy, many Americans are shut out of the financial system. Five percent of households lack a bank account, and an additional thirteen percent rely on expensive or predatory fringe financial services, such as check cashers or payday lenders.

    Financial inclusion presents a policy trilemma. It is possible to simultaneously achieve only two of three goals: widespread availability of services to low-income consumers; fair terms of service; and profitability of service. It is possible to provide fair and profitable services, but only to a small, cherry-picked population of low-income consumers. Conversely, it is possible to provide profitable service to a large population, but only on exploitative terms. Or it is possible to provide fair services to a large population, but not at a profit.

    The financial inclusion trilemma is not a market failure. Rather it is the result of the market working. The market result, however, does not accord with policy preferences. Rather than addressing that tension, American financial inclusion policy still leads with market-based solutions and soft government nudges and the vain hope that technology will somehow transform the fundamental economics of financial services for small balance deposit accounts and small dollar loans.

    This Article argues that it is time to recognize the policy failure in financial inclusion and give more serious consideration to a menu of stronger regulatory interventions: hard service mandates that impose cross-subsidization among consumers; taxpayer subsidies; and public provision of financial services. In particular, this Article argues for following the approach taken in Canada, the EU, and the UK, namely the adoption of a mandate for the provision of free or low-cost basic banking services to all qualified applicants, as the simplest solution to the problem of the unbanked. Addressing small-dollar credit, however, remains an intractable problem, largely beyond the scope of financial regulation.

  • The Miscalculations Underlying Miller & Zywicki’s Payday Loan Paper

    Posted by

    Adam Levitin

    Earlier this month Professors Todd Zywicki and Thomas Miller, Jr. wrote an op-ed in the Wall Street Journal arguing against payday loan regulation, based on their new empirical paper. Miller & Zywicki wrote:

    Our findings will startle the rule writers at the CFPB. Contrary to the research cited in the CFPB’s 2017 rule, which claimed that “loans are almost always made at the maximum rate permitted,” we found that neither fees paid nor loan amounts inexorably rose to maximum allowable levels when those allowable levels were reasonable.

    The implication is that there must be price competition among payday lenders with supply and demand setting prices, vitiating the need for regulation.

    The problem is that Miller and Zywicki have incorrectly calculated the maximum fees permitted in numerous states. They wrongly assume that the effective rate charged for the first $100 of credit also applies to higher amounts. In fact, in many states, there is either a tiered, decreasing rate or a rate plus a flat fee included in any loan. As a result, Miller & Zywicki calculate the maximum permitted fees as being substantially higher than they in fact are in every state in which they find lenders are not pricing up to the legal limit.

    Once this error is corrected, Miller and Zywicki’s figures actually confirm a truth that has long been obvious to anyone who has ever looked at payday loan pricing: there is no price competition, as lenders virtually always price up to the legal limit.

    If my (lengthy) analysis below the break is correct, Professors Miller and Zywicki ought to retract both their op-ed and their paper. This is the sort of error for which op-eds and research papers are properly retracted. While Professors Miller and Zywicki might be opposed to payday regulation on ideological grounds, they surely do not want to base their claims on erroneous calculations of state fee caps.

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  • Getting Ahead of Consumer Loan Defaults Post-Pandemic

    Posted by

    Pamela Foohey

    On this Tuesday, the Supreme Court refused to lift a ban on evictions for tenants that the Centers for Disease Control and Prevention recently extended through the end of July. The eviction moratoria is one of a handful of debt pauses put in place by the federal government during the COVID-19 pandemic that are set to expire soon. The student loan moratorium ends on September 30. The mortgage foreclosure moratorium ends on July 31. In anticipation of the end of the foreclosure moratorium, this week, the CFPB finalized new rules that put into place protections for borrowers that servicers must use before they foreclose.

    Student loans and mortgages are most people's two largest debts. But they are not the only large loans that people are in danger of getting behind on post-pandemic. Indeed, when student loan and mortgage debts become due, people may prioritize paying them ahead of car loans, credit cards, and similar. In a new op-ed in The Hill, Christopher Odinet, Slipster Dalié Jiménez, and I set forth how the CFPB can use its legal authority to steer a range of loan servicers to offering people affordable modifications. As a preview, we suggest that the CFPB should issue a compliance and enforcement bulletin directing loan servicers to make a reasonable determination that a borrower has the ability to make all required, scheduled payments in connection with any modification.

    The piece is a short version of our new draft paper, Steering Loan Modifications Post-Pandemic, which we wrote as part of the upcoming "Crisis in Contracts" symposium hosted by Duke Law's Law & Contemporary Problems journal. The paper contains more about what federal agencies already are doing to get ahead of mortgage modification requests, about why similar is needed for the range of consumer loans, and about the reasoning behind our suggestion that the CFPB use its prevent what we term modification failures.

  • Commercial and Contract Law: Questions, Ideas, Jargon

    Posted by

    Melissa Jacoby

    In the Spring I am teaching a research and writing seminar called Advanced Commercial Law and Contracts. Credit Slips readers have been important resources for project ideas in the past, and I'd appreciate hearing what you have seen out in the world on which you wish there was more research, and/or what you think might make a great exploration for an enterprising student. This course is not centered on bankruptcy, but things that happen in bankruptcy unearth puzzles from commercial and contract law more generally, so examples from bankruptcy cases are indeed welcome. You can share ideas through the comments below, by email to me, or direct message on Twitter.

    Also, I am considering having the students build another wiki of jargon as I did a few years ago in another course. Please pass along your favorite (or least favorite) terms du jour in commercial finance and beyond.

    Thank you as always for your input, especially during such chaotic times.

  • Hope for Helping the Prospective Payday Loan Customer

    Posted by

    david lander

    Short term (payday) loans and high interest consumer installment loans continue to deplete low income households of micro dollars and their communities of macro dollars. Although the CFPB seems intent on supporting the depletions, a good number of states have provided some relief.  Even in states without interest rate limitations there are a couple of ideas that can help.

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  • Trump Administration Declares Open Season on Consumers for Subprime Lenders

    Posted by

    Adam Levitin
    The Trump administration has just proposed a rule that declares open season on consumers for subprime lenders. The Office of Comptroller of the Currency and the Federal Deposit Insurance Corporation (on whose board the CFPB Director serves) have released parallel proposed rulemakings that will effectively allowing subprime consumer lending that is not subject to any interest rate regulation, including by unlicensed lenders.

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  • Usury 2.0: Toward a Universal Ability-to-Repay Requirement

    Posted by

    Adam Levitin

    There's bi-partisan legislation pending that would prohibit the practice of installment lenders sending out unsolicited live convenience check loan:  you get an unsolicited check in the mail.  If you cash it, you've entered into a loan agreement.  

    The debate about check loans has turned on whether consumers understand what they're getting into.  The legislation's sponsors say consumers don't understand all the terms and conditions, while the installment lender trade association, the American Financial Services Association, argues that there's no problem with live check loans because all the terms are clearly disclosed in large type font.  

    This debate about consumer understanding and clarity of disclosure totally misses the point.  The key problem with check loans is that they are being offered without regard for the consumer's ability to repay.  For some consumers, check loans might be beneficial.  But for other they're poison.  The problem is that check loans are not underwritten for ability-to-repay, which is a problem for a product that is potentially quite harmful.  Ability to repay is the issue that should be discussed regarding check loans, not questions about borrower understanding.  Indeed, this is not an issue limited to check loans.  Instead, it is an issue that cuts across all of consumer credit.  Rather than focus narrowly on check loans, Congress should consider adopting a national ability-to-repay requirement for all consumer credit (excluding federal student loans).  

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  • Unsolicited, Live Check-Credit

    Posted by

    Adam Levitin

    The Washington Post has an interesting story about consumer installment lender Mariner Finance.  Three brief observations.

    First, Mariner has found an interesting regulatory loophole.  The Truth in Lending Act prohibits the issuance of "live," unsolicited credit cards.  That provision, however, only applies to devices that can be used for multiple extensions of credit, not single use items like a check. So Mariner can mail out live checks to consumers (it presumably prescreens a population to target), without running afoul of the federal prohibition on mailing live, unsolicited credit cards.  That's a  creative way of reaching customers without having an extensive and expensive brick-and-mortar presence.  It also avoids some of the adverse selection problems of internet-based lending.

    Second, there is no federal preemption obstacle to states prohibiting the issuance of live, unsolicited checks used to create a credit balance. Mariner seems to be the only major firm doing this, and it doesn't have any preemption argument I can see.  

    Third, no one should be shocked that large financial institutions provide the money behind Mariner. Large banks don't do small dollar lending themselves; there are too many regulatory and repetitional issues, but they will provide the financing for small dollar lenders, whether by providing lines of credit or by making equity investments in them. And this has political consequences:  the lobby opposing the regulation of small dollar lenders isn't just finance companies, but also the large financial institutions that are funding them.  Consider how that might affect efforts to close the unsolicited live check loophole on either the federal or state level.