Archive for category Consumer Law
In a previous post, I suggested that the Ohio Supreme Court may or may not decide the future of payday lending in Ohio. On Thursday, June 12, the Court did issue a decision. Unfortunately for Ohio consumers and voters, the Court validated the current industry business model, deciding that these short term, small dollar predatory loans can be made under statutes that were never designed or intended to regulate payday loans.
So now we move on. Today, Senator Sherrod Brown came to the Ohio Poverty Law Center and held a press conference. His remarks focused on abuses in the industry, and called upon the Consumer Financial Protection Bureau to pass strong regulations to rein in industry abuses. I was invited to participate in that press conference, and what follows are the remarks I prepared for that press conference. Where we go from here is back to the Ohio legislature, and forward to urge and support the CFPB as they begin the process of enacting regulations.
Payday and Small Dollar Lending
My name is Linda Cook, and I am a senior attorney with the Ohio Poverty Law Center. The Ohio Poverty Law Center is a nonprofit law office that pursues statewide policy and systemic advocacy to expand, protect, and enforce the legal rights of low-income Ohioans.
I, and many other consumer advocates around the state, for years have waged a campaign, first in the legislature, and then in the courts, to rein in the abusive practices of the small dollar lending industry in Ohio. When I joined the campaign in 2006, we targeted the short term loans commonly called payday loans because that was the most common short term loan product trapping Ohio borrowers in a cycle of debt. After the passage of reform legislation in 2008, the industry immediately migrated to other loan licensing statutes that pre-dated payday lending and continued offering the same predatory loans. Legal aid lawyers looked to the court system to interpret Ohio’s small loan lending statutes and to confirm the intent of the legislature and the will of Ohio’s voters to regulate payday loans.
On Thursday of last week, our Ohio Supreme Court told the legislature it had not accomplished what it set out to do. Ohio voters do not have the protections they overwhelmingly endorsed. I hope our legislators are energized by the decision in Cashland v. Scott to step forward in a bi-partisan effort to give Ohio consumers the protections they want and deserve.
Small dollar lending exploded in Ohio during the economic downturn from which we are all still struggling to recover. Just to give you an idea, as of last Friday, the Ohio Department of Commerce’s website shows 1,347 mortgage loan or small loan branch licensees. These are the two licenses under which former payday lenders are now doing business. No lenders are licensed under the Short Term Loan Act, the statute passed to reform payday lending.
In addition, auto title lending has moved into Ohio. These business sought licenses as Credit Services Organizations; currently Commerce has 45 active CSO licensees. Twenty-seven (27) of these licensees advertise that they make title loans. A quick internet check reveals that six of these 27 title loan companies have a total of 585 store front locations throughout Ohio. Yet, these companies are not really lenders. They act basically as brokers, arranging loans with out-of-state lenders and collecting fees that range from 20% to 80% of the principal. These fees are in addition to loan origination fees, credit check fees, lien recording fees, and interest paid to the lender.
As this information demonstrates, the small dollar lending market is very nimble. When regulators or legislators close one door, this industry finds a way to open another to get into the pockets of cash strapped consumers. The industry stresses that these loans are helping many consumers pay their bills. The main industry group says: “Given the recession and the economy that we are in, many Americans have depleted their savings and there is no cushion, many are living paycheck to paycheck and must turn to short-term credit options to manage their financial obligations.” Sadly, many Ohioans have been very hard hit by the recession, and are struggling to meet financial obligations. Knowing that your pay check will not stretch far enough to cover your bills is stressful and makes consumers vulnerable to payday and auto title loans, deposit advances, personal installment loans, and other small dollar predatory loans.
These loans are predatory because they are not based on the borrower’s ability to repay. As Senator Brown has already told you, the CFPB found that borrowers are using these loans to meet basic expenses, and paying back much more in fees that they pay in principal. According to another study, 37% of borrowers surveyed reported being so desperate for cash that they would accept a loan under any terms.
These loans are predatory because industry profitability depends on repeat borrowing. Many lenders offer incentives to encourage repeat borrowing. Borrowers can achieve Silver, Gold or Platinum status for repeat borrowing, and receive discounts or bonuses for referring new customers. According to industry analysts, in a state that permits $15 in fees for $100 borrowed, an operator needs a new customer to take out 4 to 5 loans before that customer becomes profitable.
This industry is creative, and very sophisticated, involving loan brokers and lead generators, partnerships with out-of- state companies and entities that exist only on the internet – all designed to maximize fees and profit for an industry that targets those least able to repay the principle, thus keeping borrowers in a cycle of debt.
Payday and other short term small dollar loan products hurt borrowers and their families by trapping them in a cycle of debt, draining money away from the household.
Payday also hurts our communities and our economy. A 2013 study from the Insight Center for Community Economic Development examined the net impact of payday lending in terms of value added to the national economy and jobs. Insight’s study found that the payday lending industry had a negative impact of $774 million in 2011, resulting in the estimated loss of more than 14,000 jobs. U.S. households lost an additional $169 million as a result of an increase in Chapter 13 bankruptcies linked to payday lending usage, bringing the total loss to nearly $1 billion. These findings of net economic loss were confirmed most recently by the Louisiana Office of Financial Institutions, whose study showed the impact of payday lending resulted in a net economic loss of $42 million in economic activity for Louisiana.
Now, more than ever, we need strong regulations. The Consumer Financial Protection Bureau has carefully and thoroughly studied the small dollar loan market. It is now situated to enact regulations that protect consumers from the current array of small dollar loan products, and anticipate future abusive products. Consumers need access to credit that is reasonable and affordable, grounded in sound lending practices.
But the CFPB is not the sole regulator of the small dollar lending marketplace. Ohio has control over who does business with Ohio citizens, and how they do business. CPFB and state action are complementary. Ohio can set interest rate caps, require a minimum number of payments and minimum loan terms, and eliminate fee harvesting middle men. Our legislators need to act now. Ohio borrowers deserve a fair marketplace.
In the struggle to regulate the short term, small dollar loan industry, one theory regularly pops up. This theory states that if such loans are capped and regulated, violent loan sharks will take the place of legitimate small loan businesses that would not be able to survive under such onerous regulation. The violent loan shark threat is mainly raised by industry members and supporters, as most recently happened in Idaho, where a legislative fight to rein in payday loans is waging. An industry supporter quoted in the local news cautioned that making it harder to obtain payday loans could drive borrowers underground. “The danger is that they turn from this sort of legal high-cost loans to illegal high-cost loans such as loan sharking, which, of course, is not a good thing.” In a 2012 article from the Washington and Lee Law Review entitled Loan Sharks, Interest-Rate Caps, and Deregulation, Professor Robert Mayer debunks this “loan shark thesis” using well-researched historical evidence and common sense analysis.
According to Mayer, loan sharks have existed in America at least since the Civil War. The name comes from their predatory behavior, in which the lender seeks to keep the borrower in a cycle of repeated renewals of the high-interest loan. The lender is more concerned with the regular interest payments than the principal itself. Enforcement methods of these early loan sharks did not involve violence at all; instead, loan sharks focused on non-violent personal harassment, wage assignments, and power-of-attorney based judgments to get their money. The idea of violent loan sharks with ties to organized crime did not arise until the 1960s, when splashy headlines captured the public’s attention and forever linked the term to violent enforcement of repayment.
Payday loan regulation was enacted in about three quarters of the states by the mid-twentieth century and was based on a common structure, which limited not only interest rates but contained other regulatory oversight. By the 1950s, many commentators were declaring the problem of predatory lending over because of this regulation, which had placed reasonable limits on the small loan industry.
According to Mayer’s analysis, violent loan sharks historically did not simply pop up wherever strict regulations were enacted. They were limited to certain geographic areas, which tend to be large metropolitan areas like New York, Chicago, and Philadelphia. This suggests that mob-tied loan sharks exist only where organized crime is prevalent, which makes logical sense. It seems unlikely that criminals are in the business of monitoring legislation to pick and choose where they will operate as illegal lenders. Moreover, loan sharks did not come about right after regulation; it took a relatively long time. For instance, Illinois passed a regulatory law in 1917, yet there is no historical evidence of loan sharks being active there prior to World War Two.
Moreover, loan sharks do not target people living paycheck-to-paycheck because the loan sharks do not want to be forced to violently enforce the loan agreement; no one wins when the lender does not get his money back. They are careful to only loan money to those who are likely to pay them back in a short period of time. Payday lenders, on the other hand, cater to the working class who sometimes require cash to tide them over until their next payday. The markets for loan sharks and payday lenders are entirely different, so a rise or fall in one will not necessarily affect the other.
Nevertheless, the “violent” loan shark business and the payday loan business share a common business model. Both are more interested in keeping borrowers in a cycle of debt and profiting from continued interest payments. Multiple studies of the payday loan industry document that repeat borrowing is the norm, and that the industry depends on repeat borrowing to make enough money to stay in business.
A number of states have never legalized the short term, small dollar loans commonly called payday loans, and several others who initially permitted payday lending have since imposed interest rate caps, or allowed enabling statutes to lapse. Yet, the industry has not put forth any credible evidence of an influx of violent, mob-tied loan sharks roaming the streets, filling a lending void in those states.
As Mayer notes, no specific evidence ties payday loan regulation to criminal lending because none exists. Modest regulation of the payday loan industry does not bring violent loan sharking to the forefront of the small loan industry. It does, however, save working class people money and helps prevent them from falling into a destructive debt cycle.
On December 10, Ohio legal aid advocates, represented by Julie Robie from the Legal Aid Society of Cleveland, participated in an oral argument before the Ohio Supreme Court in the case of Ohio Neighborhood Finance, dba Cashland v. Scott. What is notable about our participation is that legal aid did not represent any party involved in this case. Cashland had its stable of expensive big firm lawyers to brief and argue the case. Mr. Scott has long since gone on with his life, having made no appearances in any of the courts hearing his case. Legal Aid and our allies appeared as amici, or friends of the court, to give the Ohio Supreme Court the consumer perspective on the issues involved in this important case.
This case is important for consumers because it challenges the current business model of payday lending in Ohio. As some of you may know, in 2008, Ohio adopted a statute reforming payday lending, repealing the old business model that allowed short term, single pay loans with 391% APR. Ohio has never used the term “payday” loans in its statutes – when enabled in 1995, they were “loans by check cashing lender licensees.” These old loans were eliminated, and replaced with “short term loans.” The loan period for short term loans must be a minimum of 31 days, with a maximum APR of 28%.
Despite legislative reform, payday lending continues as usual for Ohio borrowers. No lenders are licensed under, or making loans under, the Short Term Loan Act. Instead, lenders like Cashland made deliberate business decisions to continue making payday loans, shoehorning into other lending licenses and making convoluted legal arguments to justify evasion of Ohio law. The Elyria Municipal Court and the 9th District Court of Appeals said Cashland cannot make payday loans under the lending license they currently hold. Now it is up to the Ohio Supreme Court to say “yes” or “no.”
But if the Ohio Supreme Court says no – no payday loans – what will this mean for Ohio borrowers? No more payday loans, at least in this current form? I wish. Unfortunately, the consumer small loan industry will continue to flourish. Even as we await the Cashland decision, cash-strapped Ohioans can get a short term consumer installment loan secured by a postdated check. Or they can stop in their friendly neighborhood auto title loan shop and walk out with a loan secured by the title to their car. And all of this and more can be done over the internet and without leaving the comfort and convenience of home. This market, “the financially underserved market”, generated $89 billion in fee and interest revenue in 2012. This industry is limited only by the ingenuity of its management teams, clever legal staff, and the greed of its funders and investors.
Under the veneer of industry best practices and superior customer service, the short term loan industry is making money selling credit to struggling families as a means to bridge the income gap. None of these financial products help struggling families address the underlying problems of chronic income shortfalls, or help families build wealth so they can move up the socio-economic ladder. Despite very credible studies showing that the economic activity generated by this industry results in a net loss to the economy, this industry will thrive until policymakers step up to the plate.
Stepping up to the plate doesn’t just mean better regulation of the industry and more consumer protections. Enforcement of existing consumer protection laws and the political will to stop predatory lending will always lag behind this constantly moving target. Stepping up to the plate means policy makers must address the much tougher issues involved in closing the income gap between low wages and what it really takes to make ends meet.
The political struggle to expand Medicaid, the Governor’s refusal to apply for a federal waiver to waive work requirements for food stamp recipients, the shrinking Ohio Works First program, continued high unemployment rates and Congress’s refusal to extend Emergency Unemployment Compensation all indicate that Ohioans will not soon see any real shift toward policies that support working families in the struggle to not just to make ends meet, but to make a better life for themselves and their children.
In the meantime, 46 Credit Services Organizations, 234 Ohio Mortgage Loan Registrants with 1202 Mortgage Loan registrant branch offices, 32 Small Loan Licensees with 171 Small Loan licensee branch offices, 150 licensed pawnbrokers with 178 branch store fronts (as of December 19) will be in our neighborhoods or at our fingertips to help us get the money we need. As long as we can afford their exorbitant fees and interest.
Recently, Representative Lou Terhar introduced HB 173 in the Ohio House. The bill purports “to regulate the for-profit debt settlement industry in Ohio.” Although this industry needs significant regulatory reforms, the proposed modifications of state law would offer mostly redundant regulation while removing fees caps that protect Ohio’ s citizens. The bill that would emerge is bad for Ohio consumers and bad public policy for Ohio, and Ohioans should urge their representatives to just say “no” to HB 173.
Debt settlement companies attract customers through marketing campaigns designed to give debt-burdened consumers the false impression that their services will allow individuals to settle their outstanding debts at substantial discounts.
In practice, however, these companies can leave consumers with higher debt loads and adverse court judgments, while charging exorbitant fees. In doing so, debt settlement companies prey on Ohio’s impoverished citizens, many of whom have been forced to rely on their credit cards as a bridge between their income and needs in desperate economic times. The typical for-profit debt settlement business model advises debtors who enroll in a plan to stop paying their credit card bills and instead set aside money before negotiations with creditors begin. Late fees and penalty interest rates mount as a result, leaving the consumer with a larger debt than when they started. Additionally, entering a plan is no guarantee that collection activities will stop; often creditor harassment and law suits continue.
Studies show that only a small minority of debts are actually settled by the companies in this industry. Even the American Fair Credit Council, the debt settlement industry’s trade association, has admitted that 66% of clients will not see even 75% of their debts settled. Additionally, the industry fails to include fees and the tax consequences of debt forgiveness in the analysis of debtor savings, giving an incomplete picture of the “benefits” of for-profit debt settlement plans. Because of these issues, it is unsurprising that the Better Business Bureau has called the industry “inherently problematic,” and the Office of the Comptroller of the currency has charged that “this is not a legitimate method of satisfying debts.”
Currently, Federal Trade Commission rules ban the most abusive practice common to the debt settlement industry: charging advance fees. Additionally, certain disclosures must be made to potential customers regarding the nature of the debt settlement company’s business practices and the consequences of entering a plan. Existing Ohio law puts fee caps on what this industry can charge for its services, and gives debtors who are victimized by abusive practices claims for relief under the Consumer Sales Practices Act.
HB 173, if enacted, will codify many of the FTC’s restrictions into Ohio law. However, caps on fees are abolished by the proposed bill. With such provisions, HB 173 is an example of “faux reform” for the citizens of Ohio. The proposed regulations are already in place, and the debt settlement industry will have greater freedom to charge astronomical fees. This should come as no surprise, given that the bill is backed by the American Fair Credit Council, the debt settlement industry’s trade association. The support of this organization should be telling for Ohio citizens who seek to restrain the harmful practices of debt settlement companies. For these reasons, Ohioans should urge their representatives to vote “no” on HB 173.
The Medicaid expansion currently being debated in the state budget would improve the health, safety and stability of Ohioans and Ohio families.
People who have access to health care are healthier. They get more appropriate preventive care and avoid emergency-room visits and heath crises. Many low-wage workers do not have access to employment-based health insurance, and they cannot afford to buy private insurance.
Families and individuals with access to health care are safer. They can get the health care they need, including immunizations and prescription medications, to avoid health risks and address chronic conditions.
Families and individuals with access to health care are more stable. Medical debt was a factor in 62 percent of the 38,000 bankruptcy filings in Ohio in 2012. Medical debts also play a significant role in home foreclosures. Access to health care would significantly reduce the number of bankruptcies and home foreclosures so that more Ohioans could remain economically stable and independent.
Debt also is a factor in domestic violence. Reducing medical debt would lessen family stress and domestic violence, keeping more families intact and stable.
Access to health care also will make Ohioans more employable, increasing their financial and social stability.
The Medicaid expansion would provide a helping hand to Ohio, Ohioans and Ohio families. It would keep Ohioans healthy, safe and stable. It is the right decision for Ohio and all of our residents.
– EUGENE R. KING
Ohio Poverty Law Center
Robo-signer: Sounds like a boring sci-fi movie that’s light on action. In reality, it’s a back-office system of quickly signing off on foreclosure documents like affidavits without actually doing what the affidavits say was done. Also known as cheating and lying. Tampa Bay Times, Dec. 26, 2010
Robo-signing, as a common practice in the financial sector, has been on my mind most recently because of the December 4, 2012 announcement by Cash America (doing business in Ohio as Cashland) that it will refund millions of dollars to about 14,000 Ohio borrowers taken to court by the lender to collect on defaulted loans. To quote the Fort Worth Star-Telegram: “The company, which also makes so-called payday loans, said it recently learned that some employees ‘did not prepare some court documents properly in many of its Ohio collections legal proceedings.’ ”
We can translate this to mean employees were robo-signing documents submitted in court cases to prove Cashland’s cases against borrowers (see above – a.k.a. cheating and lying). Cash America, a payday lender and pawn broker, is the latest lending business to admit to irregularities in the production of documents necessary to prove its claims in court against borrowers. The first industry, of course, was mortgage servicing.
The second financial industry to have fraudulent practices exposed was the debt buying industry. Midland Finance, one of the largest debt buyers in the country, was sued in 2008 for filing false affidavits. In discovery, it came to light that “specialists” in the litigation support department of Midland would sign between 200 and 400 computer generated affidavits per day. Midland was also sued by and settled with the Minnesota Attorney General in mid-2012. The settlement contains a number of provisions, but to address robo-signing, Midland must not file affidavits with the court unless the person has: a) read and understood them, b) confirmed the authenticity of any documents filed with the affidavit, c) only based the affidavit on the signer’s personal knowledge, and d) signed the affidavit in the presence of a notary who acknowledges the affiant’s signature in accordance with law. These criteria are almost identical to some standards agreed to by the five major servicers in the national mortgage settlement. These sound a lot like promising to follow the law that already applies.
Cashland calls the problems that led to its voluntary loan refund program “technical errors”. This is the same argument made by mortgage lenders and debt collectors. Paperwork problems are technical errors that do not change the bottom line – the homeowner/consumer borrowed the money, or used the credit card, and defaulted. They owe the money to someone.
Let’s think about that. Our legal system is an adversarial one, requiring each party to prove its claims or defenses using evidence that meets standards of reliability, dependability, and truthfulness established by the Rules of Court and the Rules of Evidence. Endorsing results over process erodes the fundamental fairness of the system that depends on all parties being held to the same standards.
In Cash America’s case, the problems occurred repeatedly over the course of five years. This is not technical error – this is evidence of a standard business practice – a practice that reflects a disregard for integrity of the legal system.
Cash America estimates the voluntary loan refund program will cost $13.4 million. To put this in perspective, Cash America reported $135,963,000 in net profits in 2011; in the second quarter of 2012, the company reported net income of $29,820,000, and revenues of $411.6 million.
Those of you who read this blog have probably figured out that the continued existence of payday lending in the State of Ohio, despite legislative reforms in 2008, is a real sore point for me, and many other consumer advocates around the state. I have likened the various iterations of payday loans to Hydra, the mythical beast that grew two heads in place of every one that was cut off, making it almost impossible to kill. In Ohio, payday lenders are now pawn brokers, check cashers, mortgage loan lenders, small loan lenders, precious metal dealers, and credit services organizations. At least two companies are offering auto title loans – something that is strictly prohibited by the Short Term Loan Act – that Act under which not one lender is licensed. And if borrowers do not want to walk to a store front, one google of “payday” reaps hundreds of internet options – each claiming to be better and faster than the rest. This ever changing domain of lending is tough for states to get a handle on.
The federal Consumer Financial Protection Bureau (CFPB) began gathering information about the payday industry in January 2012 with a field hearing in Birmingham Alabama. In a countermove, the industry is pushing for federal legislation, HR 6139, known as the Consumer Credit Access, Innovation, and Modernization Act. This bill “[D]irects the Comptroller of the Currency to charter qualified nondepository creditors known as National Consumer Credit Corporations (Credit Corporations) to offer financial products or services.”. In short, this bill gives payday lenders a pass on CFPB authority, and an end run around state licensing and consumer protection laws. On July 24, 2012 a Deputy Comptroller for Compliance Policy from the Office of the Comptroller of Currency (OCC) testified before the Senate subcommittee hearing the bill, concluding: “…HR 6139 raises serious consumer protection, compliance, and safety and soundness issues by creating a new federal charter for companies concentrating on products and services most prone to abuse and that are most often targeted to minority populations, low-income neighborhoods, and communities with high concentrations of our military service members.” On October 5, 2012 41 state Attorneys General, including Mike DeWine, sent a letter to House and Senate leaders asking them to oppose HR 6139.
It is good we have advocates on the national front opposing this legislation, as well as other industry attempts to expand their scope and reach. For example, see the letter to the OCC urging the Comptroller to stop Urban Trust Bank from partnering with a payday lender and a pre-paid card issuer in order to evade state usury laws and make payday loans on prepaid cards.
Study after study confirms that a significant percentage of payday loan borrowers are borrowing because their expenses consistently exceed their incomes, a situation ripe for abuse. These high cost, short term loans are going to be on the market for the foreseeable future. Currently there seems to be no political will in Ohio to revisit this lending market. Nevertheless, we all need to be vigilant, and keep hacking away at the heads of the beast when we have opportunities to do so.