Category: Underbanked/Fringe Banking

  • Churches as an Alternative to Payday Lenders

    Posted by

    Pamela Foohey

    Payday loans are exceedingly expensive, often trapping borrowers into a cycle of rolling their loan over for many months while interest compounds. Postal banking has been suggested as a way to provide people with better access to less-expensive loans. And the CFPB has indicated that it intends to regulate payday and similar high-cost loans (maybe that will happen soon?). In the meantime, some churches apparently have taken matters into their own hands.

    A recent Washington Post article describes how churches in Virginia have helped some of their members secure manageable loans from the Jubilee Assistance Fund (very apt name) and the Virginia United Methodist Credit Union. ("Faith-based" credit unions exist across the country and also offer loans to churches. A few of these credit unions end up as creditors in churches' Chapter 11 cases). The article reports that similar church-run lending programs are sprinkled across the country, with churches in some states seemingly having more coordinated efforts.

    In the face of the payday industry, these programs undoubtedly are a blessing to the lucky church members who are able to obtain loans. The existence of these programs–and the interesting personal stories in the article–perhaps show how crucial regulation of the high-cost lending industry is, as well as indicate how desperately many people want and would benefit from access to lower-cost lending options.

  • Prepaid Card Use on the Rise Among Unbanked and Underbanked

    Posted by

    Pamela Foohey

    Prepaid CardLast week, the FDIC released its 2013 National Survey of Unbanked and Underbanked Households. Some of the Survey's results were similar to the FDIC's 2009 and 2011 surveys. 7.7% of households were unbanked. Another 20% of households were underbanked. I took note of the Survey because its maps of unbanked and underbanked rates by state have been receiving some attention online. But what I think is more intriguing are the Survey's questions about prepaid cards.

    General purpose reloadable prepaid cards, though still a small segment of the consumer financial
    products market, have grown rapidly in past years — from $28.6 billion in 2009 to close to $65 billion in 2012 (as previously discussed). Consistent with this growth in dollars, the Survey found that prepaid card use had increased among all households from 2009 to 2013 — from 9.9% to 12%. More interestingly, the share of unbanked households that used prepaid cards had increased more dramatically — from 12.2% in 2009 to 17.8% in 2011 to 27.1% in 2013. By comparison, 19.6% of underbanked households and 8.8% of fully banked households had used prepaid cards in 2013. When combined, unbanked and underbanked households comprised the majority (55%) of prepaid card users in the previous 12 months.

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  • Local and State Treasurers Can Build Wealth in Struggling Communities

    Posted by

    Nathalie Martin

    Sometimes you can beat the door down with efforts to get Federal and State officials to tackle problems, but at the end of the day, locals can best get the job done, quietly and quickly. A story in Monday’s New York Times bears this out.  For example, San Francisco City Treasure Jose Cisneros noticed that families who finally took advantage the of the earned income credit, the country’s largest public benefit program, often had no bank accounts in which to deposit their refunds. This meant losing a portion of this important public benefit to check cashers and others.

    Because of this problem, Treasurer Cisneros started a program called Bank On, that helps people on the financial fringes open bank accounts and develop credit histories. This model has spread across the country, leading the Treasury Department to conclude that Bank On has “great potential” to “create a nationwide initiative that attends to the needs of underserved families and works to eradicate financial instability throughout the country.” In 2010, Mr. Cisneros also started Kindergarten to College, a program that automatically opened a bank account with $50 ($100 for low-income families) for every kindergartner in public schools. The city pays for the administration and initial deposits, while corporate, foundation and private donations provide matching money to encourage families to save more. His office even figured out how to open bank accounts for thousands of children without social security numbers.

    These and similar effort have now been replicated in more than 100 cities, showing that even mundane public races might make a big difference in the health and well-being of citizens, if not the entire U.S. economy.

  • Is a 36% Cap Radical?

    Posted by

    Nathalie Martin

    I was pleased to see today’s New York Times editorial entitled “A Rate Cap for All Consumer Loans.”  It created a very public description of an industry indiscretion involving loaning money to the military at over 36%. Those loans are illegal because a federal law makes it so, a law that passed with broad and deep bipartisan support because trapping military personnel in high-cost loans interferes with military readiness and thus threatens national security. This editorial, not in some fringe publication, but rather the New York Times, argues that we all deserve the same protections from high cost loans.  I agree (in this recent article), and think the time is right to start listening to people and not industry on this topic.

    Is a federal 36% cap radical? Historically, 36% would seem heinously high. Plus, if 36% is radical, why does much of the U.S.‘s eastern seaboard's state law forbid consumer loans with interest rates of over 36%? Are these radical states? The public favors a hard cap, over and over again in every study,  regardless of politics. Hearing politicians support consumer loans with 500% or even 1,000% interest, is so mysterious it makes me want to look at their list of campaign contributors.  Remember, real people over political contributions. We elect politicians and pay their salaries. In turn, they speak for us. Do you like what they are saying?

  • Online Payday Loans Cost More Than Storefront Payday Loans And Customers Are Harassed More Egregiously

    Posted by

    Pamela Foohey

    Over the last couple years, The Pew Charitable Trusts has put together a useful series of reports regarding payday lending in the United States. The fourth installment was released on October 2. Its title is quite descriptive: "Fraud and Abuse Online: Harmful Practices in Internet Payday Lending". The report documents aggressive and illegal actions taken by online payday lenders, most prominently those lenders that are not regulated by all states: harassment, threats, unauthorized dissemination of personal information and accessing of checking accounts, and automated payments that do not reduce principal loan amounts, thereby initiating an automatic renewal of the loan(!). Storefront lenders engage in some of the same tactics, but online lenders' transgressions seem to be more egregious and more frequent.

    Putting these disturbing actions aside, are consumers getting a better deal online than at storefronts? Given the lower operating costs, it is logical to assume that these exorbitantly expensive loans might be just that much less expensive if purchased online? Nope. Lump-sum loans obtained online typically cost $25 per $100 borrowed, for an approximate APR of 650%. The national average APR of a store-front lump-sum loan is 391%. Why the disparity on price and severity of collection efforts?

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  • New Case Holding High-Cost Loans Unconscionable and a Payday Loan Video

    Posted by

    Nathalie Martin

     A little bit of payday loan news for our readers. First, the New Mexico Supreme Court has held that 1100% high cost installment loans (the payday loan substitute in states where payday loans are illegal) are unconscionable.

    Also, did you see John Oliver’s bit on payday loans this weekend? Take a look.  It even features Sarah Silversman. Warning: There is some bad language in the video.

  • Operation Choke Point Hysteria: Are Choke Point’s Critics Responsible for the Account Closings?

    Posted by

    Adam Levitin

    At today's House Judiciary Committee hearing on Operation Choke Point it seemed that Choke Point's critics are conflating a fairly narrow DOJ civil investigation with separate general guidance given by prudential regulators.  In particular, Rep. Issa attempted to tie them together by noting that the DOJ referenced such guidance in its Choke Point subpoenas, but that's quite different than actually bringing a civil action on such a basis (or on the basis of "reputational risk"), which the DOJ has not done.  

    There is a serious issue regarding the bank regulators' use of "guidance" to set policy. Guidance is usually informal and formally non-binding, but woe to the bank that does not comply–regulators have a lot of off-the-radar ways to make a bank's life miserable.  This isn't a Choke Point issue–this is a general problem that prudential bank regulation just doesn't fit within the administrative law paradigm.  There are lots of reasons it doesn't and perhaps shouldn't, but when it is discovered by people from outside of the banking world, it seems quite shocking, even though this is how bank regulation has always been done in living memory:  a small amount of formal rule-making and a lot of informal regulatory guidance.  By the same token, however, compliance with informal guidance is enforced informally, through the supervisory process, not through civil actions, precisely because the informal guidance is not actionable.  Yet, that is what Choke Point critics contend is being done–that DOJ is using civil actions to enforce informal guidance.  

    I don't think that's correct (or at least it hasn't been shown).  But the conflation of DOJ action with prudential regulatory guidance may be creating the very problem Choke Point's critics fear.  

    Bank compliance officers may be hearing what Choke Point critics are saying and believing it and acting on it.  If compliance officers believe that the DOJ will come after any bank that serves the high-risk industries identified by the FDIC or FinCEN, not just those that knowingly facilitate or wilfully ignore fraud, they will respond accordingly.  The safe thing to do in the compliance world is to follow the herd and avoid risks.  The attack on Operation Choke Point may well have spooked banks' compliance officers, who'd aren't going to parse through the technical distinctions involved.  

    What matters is not what the DOJ actually does, but what compliance officers think the DOJ is doing, and they're likely to head the loudest voice in the room, that of Choke Point's critics.  So to the extent that we are having account terminations increasing after word got out of Operation Choke Point it might be because of Choke Point's critics' conflation of a narrowly tailored civil investigation with broad prudential guidance.  Ironically, we may have a self-fulfilling hysteria whipped up by Choke Point critics, who shoot first and ask questions later.  

  • Being Unbanked, Part 1

    Posted by

    Katie Porter

    Note from Katie Porter: This guest post is from Jennifer Song, senior staff attorney at the California Monitor Program. Jennifer pitched in and attended this workshop, and I hope Credit Slips readers will enjoy hearing about her experiences in a short series of posts. 

    Last week, I, Jennifer Song, had the opportunity to join FinX/LA 2014:  Connecting to the Consumer Financial Experience.  Hosted by the Center for Financial Services Innovation as part of their three-day conference on consumer financial services,  FinX was an “in-the-field activity” that promised to give participants a “deeper understanding of the complexity of consumers’ financial lives in accessing financial services.” 

    Upon arriving at the conference, we were placed into groups of four and given worksheets. The tasks to complete included cashing a personal check, cashing a pay check, purchasing a general purpose reloadable card and reloading the card, purchasing a money order, inquiring about auto title loans, etc.  We were given a little over two hours to complete these tasks in lower income areas throughout Los Angeles. With only a quick slideshow of interesting facts and a pep talk, we set off on our journey. 

    While I will share my experience and how it shaped my thinking on low-income banking, I want to start by identifying factors that may have prevented me from fully experiencing and understanding the challenges facing the under banked and unbanked. PhotoFirst, we were traveled in groups of four; most people using these services do not travel in packs or with an entourage, and are not able to consult each other about transactions.  Second, while we were told to “dress down” in order to “blend in” while performing these transactions, I do not believe we were fooling anyone at the shops we visited.  Third, and perhaps the most glaring contrast, was that we were chauffeured around Los Angeles in a town car to perform these transactions. While I assume there is access to public transportation in or around these financial centers, Los Angeles is notorious for being difficult to navigate via the public transportation system (did you even know it has a subway?) Many of the financial centers were clustered together but major banking institutions were noticeably absent in these areas. 

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  • I am Approved for a Payday Loan

    Posted by

    Pamela Foohey

    Received the automated call to my cell phone yesterday morning, whereupon my phone recorded a 45 second message. Not only am I approved for a payday loan in the amount of up to $1,500, I apparently previously applied for a payday loan, and given that "as of April 2014, our lenders have lowered their requirements for loan qualification, I am now approved" (emphasis added). (I did not apply for a payday loan, ever, for the record.) All I need to do is go to this handy website and enter my pre-approval/promo code, which was provided to me twice during the call. The call ended by assuring me that there were no hidden fees to get my loan and congratulating me again.

    The unsolicited call was very timely in light of my previous post hypothesizing that payday lenders will venture even more into the Internet arena in the near future. I wonder how this lending network got my cell number (someone sold it to them? data breach?), and how they decided my number belonged to a person from whom it would be productive to solicit business. As they transition to more Internet lending, maybe payday lenders are really widening their targeting? In fact, I received a call a few months ago from a live person asking me if I wanted to consolidate my payday loans. (How many payday loans does the industry think I have?) I replied, "that sounds interesting, tell me more about this consolidation thing." To which the caller questioned, rather sternly, "do you have any payday loans?" Upon hearing that I have none, the caller promptly hung up. Based on my completely anecdotal experiences, the world of payday lending is getting larger and larger.

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  • Will 2014 Be the Year the Bureau Takes on Payday Lending? If So, What Data Will They Use in Regulating?

    Posted by

    Nathalie Martin

     To question number one, it looks that way. According to Kim Chapman and Carter Dougherty at Bloomberg, as well as other news outlets, Director Richard Cordray has announced his intention to move forward with regulations aimed at lenders that make small loans like payday loans, title loans, and installment loans with triple digit interest rates.  The question of course is what this “oversight” and “regulation” will look like. Will the rules look something like those in Colorado, which still permits loans of up to 200% in some cases? See Pew report on this issue. Will the new regulations deem certain practices of lenders unfair and deceptive?  Will regulation of online lenders be included? What empirical data will be considered in devising these regulations? Hopefully not that found in a paper I recently read on the Online Lenders Alliance website, entitled Assessing the Optimism of Payday Loan Borrowers.

    The punch line of this study is that most payday loan borrowers expect to repay their loan on its due date and not borrow again.  Indeed, most of the borrowers in the survey did just that. Paid it back quickly.  The majority of the paper’s sample population of payday loan borrowers expected to repay the loan on its due date and not borrow again.  Only 40 percent expected to have the loan out for more than one pay period, and the mean duration of indebtedness that those borrowers expected was 36 days.  Interesting. 

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