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Payday lender installment loans evade laws and perpetuate predatory attacks on consumers

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Installment loans seem to be a softer, softer version of their “predatory” cousin, the payday loan. But for consumers, they can be even more harmful.

The use of installment loans, in which a consumer borrows a lump sum and pays back principal and interest in a series of regular payments, has increased significantly since 2013, as regulators began to curb payday lending. In fact, payday lenders seem to have developed installment loans primarily to escape this heightened scrutiny.

A closer look at the differences between the two types of loans shows why we think the growth of installment loans is of concern – and requires the same regulatory attention as payday loans.

Possible advantages

At first glance, it seems that installment loans might be less harmful than payday loans. They tend to be bigger, can be repaid over longer periods of time, and generally have lower annualized interest rates – all potentially good things.

While payday loans are generally around US $ 350, installment loans tend to be between $ 500 and $ 2,000. The ability to borrow more can benefit consumers with greater short-term needs. Since installment loans are repaid in bi-weekly or monthly installments over a period of six to nine months, lenders say consumers are better able to handle the financial pressure that brought them to their storefront in the first place. .

Payday loans, on the other hand, typically require a lump sum payment for interest and principal on the borrower’s very next payment date, often within a few days. Lenders offer cash in exchange for a post-dated check drawn on the borrower’s checking account for the amount borrowed and “fees” – what they often call “interest” to get around the rules of usury.

Finally, and perhaps most importantly, installment loans are often less expensive than payday loans, with annualized interest rates of around 120% in some states, compared to the typical range of payday loans from 400% to 500%.

Harmful to consumers

Unfortunately, some of the structural features that seem beneficial can actually be detrimental to consumers – and make them even worse than payday loans. For example, the longer repayment period keeps borrowers in debt longer and requires sustained discipline to make repayments, which can increase stress and the possibility of error. And the fact that the loan amounts are larger can work both ways.

It is true that the small amount of payday loans is often not enough to cover the immediate needs of a borrower. About 80% of payday borrowers do not repay their loan in full when due, but “renew” their loan in a subsequent paycheck. Renewing a loan allows borrowers to pay only interest and then extend the loan in exchange for another payroll cycle to pay off at the cost of another interest payment.

In a recent study, we explored the effect of larger installment loans on borrowers. We used a dataset with thousands of installment loan records in which some borrowers received a larger loan because they were earning more income. Although similar in terms of factors such as credit risk and income level, slightly higher income borrowers were offered a loan of $ 900, while others were given only $ 600.

We found that borrowers with these larger loans were more likely to subsequently incur debt on other installment loans, in-store and online payday loans, and auto title loans. Our results suggest that the higher initial installment loan may not serve its primary purpose of helping borrowers manage their finances and may in fact have caused increased financial pressure.

Abuse and abuse

As some of our previous research has shown, even payday loans, with their annualized rates and very high lump sum payments, can be beneficial to consumers in some cases. Installment loans are no different. When used with care, they can help low-income consumers with no other credit access smooth consumption. And when they are repaid on time, loans can certainly provide a net benefit.

But their nature means that they are also subject to abuse and abuse. And any negative effects will apply to a larger group of consumers, as they are considered more “generalist” than payday loans. Lenders target consumers with higher credit scores and incomes than “fringe” borrowers who tend to use payday loans.

Installment loans represent an increasingly important part of the alternative credit sector. If the regulatory crackdown on payday loans continues, installment loans are likely to become the bulk of loans in the low-interest, high-interest loan market. Given the current lack of regulation of these types of loans, we hope they will receive further consideration.

Biden’s plans for payday loans and crypto take shape | Payments Source

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With Joe Biden returning to the White House to become the 46th President of the United States, his financial regulation agenda is already advancing, depending on who he has chosen to fill key roles.

Biden’s appointments of Rohit Chopra as head of the Consumer Financial Protection Bureau and Gary Gensler as head of the Securities and Exchange Commission put two consumer advocates at the forefront of reversing deregulation of incumbent President Donald Trump while strengthening oversight cryptocurrency and payday loans.

Chopra, a commissioner at the Federal Trade Commission, was previously deputy director of the CFPB and helped found the office defended by Senator Elizabeth Warren, D-Mass. Biden also appointed Gensler, the former chairman of the Commodity Futures Trading Commission. , to be chairman of the SEC. Both Chopra and Gensler have careers in government that tie them to the Obama-era reforms and regulations that followed the 2008 banking crisis.

As Warren’s ally, Chopra will face one of Biden’s most controversial cabinet confirmation hearings, but Democratic victories in Georgia’s runoff are making her way to the top CFPB position easier. Additionally, Chopra has already been confirmed to his current position at the FTC and may serve on the CFPB on an interim basis.

More financial services regulation is certain to come in the wake of the 2020 election, but the ease of confirmation hearings will go a long way in determining just how aggressive the Biden administration can be.

CFPB was heavily deregulated during the Trump years, with the Republican administration getting a key short Supreme victory giving the White House more control over the management of the CFPB. The Trump administration has also backed down payday loan regulations designed to prevent borrowers from taking on debt they could not pay.

Write for Payments SourceChristopher Peterson, director of financial services for the Consumer Federation of America, argued that the reversal of payday loans was damaging consumers, calling for interest rate cuts.

In addition, companies that offer early access to salary became popular during the pandemic and subsequent financial crisis, and respond to many of the same financial strains among consumers that often lead to payday lenders, offering a potential alternative to payday loans. Capital risk has flocked to early access payroll companies in anticipation of the trend continuing.

Chopra will likely push for reinstating the Obama-era rules for payday lending, while the CFPB will retain its centralized leadership structure rather than the decentralized structure Republicans prefer. Chopra, who was a member of the Consumer Federation of America, will likely focus on many of that association’s priorities, said Eric Grover, director of Intrepid Ventures.

Payday loans and subprime consumer credit are still high on activists’ wish lists,” Grover said, adding that there may also be a more in-depth look at crypto-related projects. currency like Diem, the Facebook-affiliated stablecoin project formerly known as Libra. Libra has long been subjected to the regulatory heat of liberals and conservatives around the world.

Crypto under surveillance

Acting as FTC Commissioner, Chopra joined UK Information Commissioner Elizabeth Denham, the EU’s Data Protection Supervisor and other international regulators in 2019 in calling for a close scrutiny of Libra. . Gensler’s appointment as head of the SEC could be bad news for Ripple, as Gensler in the past has said that initial coin offerings should be regulated like securities, a position that puts the SEC at odds with Ripple’s position that XRP is a utility. Gensler has also worked on cryptocurrency technology at MIT and is a proponent of strict cryptocurrency regulation.

“In the past, the CFPB has warned about the risks of cryptocurrencies,” Grover said. “If they become more common, if Diem goes for it, expect the CFPB to do more.”

A push to cut payday loans could open up opportunities for fintechs that offer payroll flexibility without creating the compound flow of payday loans. Blockchain and AI services have emerged in recent years using faster payment processing and lower cost alternative underwriting to short-term credit for issuers.

Chopra’s other top priorities will likely include restoring the fair loan unit and increased enforcement. Notice of proposed regulations will also likely come for open banking, signaling more rules for data aggregators like Plaid. Visa recently canceled its offer of acquire Plaid, in part because of regulatory oversight, according to Benjamin Saul, Washington banking partner at Bryan Cave Leighton Paisner.

“The focus will be on consumer ownership of data as well as third party access to banking information when approved by consumers,” Saul said, adding that the CFPB will likely continue its programs to encourage payments and fintech innovation, such as the trial disclosure sandbox. “However, the success of fintechs pursuing these avenues will depend much more on the bureau’s assessment of the net benefit to consumers of a given product or service.”

Payday loan limits can reduce abuse but leave some borrowers looking

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A sweep study Payday loan bans, expected to be published soon in The Journal of Law and Economics, found similar trends in other states. When short-term loans disappear, it is no longer the need that demands them; many customers simply turn to other expensive forms of credit like pawn shops, or pay late fees on overdue bills, the study’s authors concluded.

Mr. Munn, who works as an oil well site geologist, first borrowed from Advance America eight months ago when his car broke down. He had saved some money, but it needed a few hundred more to pay the $ 1,200 repair bill. Then his employer, react to falling oil prices, cut wages by 30 percent. Mr. Munn has become a regular at the loan store.

He loves the neighborhood vibe of the store and the friendly staff, and he views payday loans as a way to avoid debt traps he finds more insidious.

“I don’t like credit cards,” said Munn, who is wary of high balances they make too easy to accumulate. “I could borrow from my IRA, but the penalties are huge.”

At Advance America, he said, “I come here, I pay back what I took and I get a little more for the rent and the bills. I keep the funds to an extent that I can repay with the next check. I don’t want to have more problems or debts.

Advance America, which is headquartered in Spartanburg, SC, operates offices in 29 states, including 220 in Ohio. The company is studying the proposed rules and says it is not yet sure what changes it would make to comply with them.

According to Richard P. Hackett, former deputy director of the Consumer Financial Protection Bureau, the rules would drastically change and, in some places, eliminate payday borrowing in the 36 states where lenders still operate. He left the agency three years ago and now works privately on policy research, much of it sponsored by industry companies.

Max Credit Cards Don’t Stop Man From Accessing Thousands Of Payday Loans, Survey Finds

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No more than six credit cards have proven to be no obstacle for a man who has accessed thousands of payday loans, a Senate investigation said in recently released documents.

The survey, launched last October, has heard dozens of payday lending horror stories, with the federal regulator’s submission saying the practice presents “a risk of a debt spiral” in more than half of its client records reviewed.

The New South Wales organization, Financial Counseling, Hunter Valley made a submission that referred to several case studies of people bitten by payday lenders.

Service manager Maria Hatch said in one case that a man – called AB – had an average working income, was married and with one child, had six regulated credit cards with no credit available.

At that time, he had access to payday loans.

“He applied for a payday loan and got a loan of $ 3,000, then he applied for and got three more payday loans of $ 3,000 each, then he applied for another payday loan and got a loan from. $ 800, ”Ms. Hatch said.

Ms Hatch said without the help of her department the man would have lost his wife, child and job.

She said another client who was fleeing domestic violence had obtained nearly $ 15,000 in payday loans.

“She got a $ 6,000 payday loan for a car assigned to her,” Ms. Hatch said.

“She already had another $ 8,500 payday loan for a car that was written off in an accident by her ex-spouse.”

Expensive short-term loans

The Department of Social Services reported that the withdrawal of financial institutions from short-term loans has fueled the market for small loans.(

AP Images: Anthony Devlin

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The federal regulator, the Australian Securities and Investments Commission, defines a payday loan as a high-cost, short-term loan.

The commission said they included small loans of up to $ 2,000 that have to be repaid between 16 days and 1 year, as well as loans borrowed over longer periods.

The Senate survey examines the impact on individuals, communities and the broader financial system of the operations of payday lenders and leasing providers.

There is also an emphasis on unlicensed financial service providers, including “buy now, pay later” providers and short-term credit providers.

The Federal Department of Social Services used its submission to the inquiry to acknowledge concerns about payday loans.

“Over the past two decades, financial institutions have increasingly withdrawn financial products and services from low-income people or others at risk of financial hardship due to the high cost of providing these services.” , the department said.

“This has resulted in a shortage of appropriate and affordable small loans for vulnerable people, resulting in increased financial exclusion for people who cannot access traditional financial services.

Salvos alarmed by surge in payday loans

The Salvation Army told the inquiry that the effects of payday loans on families could be disastrous.

“The Salvation Army regularly sees people who are marginalized and vulnerable with this type of debt,” he said.

“The proportion of community members who come to our services with payday loans or consumer leases has grown steadily over the years, more than doubling in size from 6% in 2008/09 to 13% in 2017/18.

“The median values, after adjusting for inflation, have tripled from $ 423 in 2008/09 to $ 1,383 in 2017/18.”

Legal aid wants to act

NSW Legal Aid also filed a complaint, concerned about the exploitation of vulnerable people.

He brought to light the case of a woman he called Rachel.

“Rachel is a young single Aboriginal mother and Centrelink beneficiary from a remote community,” Legal Aid’s brief states.

“She recently left a relationship in which she suffered domestic violence.

Rachel has entered into seven payday loan agreements with the same provider over a 13-month period.

“The loan amounts ranged from $ 300 to $ 1,500,” he said.

“The majority of contracts were concluded the day Rachel finished paying for a previous contract.

“If Rachel had made all the repayments required under each of the contracts, she would have paid over $ 2,500 more than the total loan amount.”

The Australian Securities and Investments Commission used its submission to recognize the need for change:

“We reviewed 288 payday loan files and found that:

  1. 1.In 54.2% of the cases, the consumer had entered into two or more low-value credit contracts (this level of repeated use translating a risk of a spiral of debt); and
  2. 2.In 7.6% of cases, the consumer was in default on another small amount credit agreement. “

Case studies are not always accurate, depending on the credit provider

Robert Bryant, president of the National Credit Providers Association (NCPA), says the case studies provided by financial advisers have distorted the payday lending industry and portrayed the industry in a bad light.

“Of all the non-bank lenders examined as part of the Senate inquiry, only the convenience industry is currently regulated,” said Bryant.

He said some of the information provided to the investigation was incorrect.

“A payday loan is a loan of less than $ 2,000 for a term of between 16 days and 12 months,” said Bryant.

“A payday loan of $ 3,000 and $ 8,500 is not possible.”

The Senate Committee of Inquiry will hold a second public hearing in Brisbane on January 22.

Editor’s Note 1/14/19: The comment from the National Credit Providers Association has been included since this article was first published to provide a balance.

FTC Announces $ 114 Million Settlement With Payday Lenders | Goodwin

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[author: Jackie Odum]

On February 11, 2021, the Federal Trade Commission (FTC) ad a $ 114 million settlement with the owners and operators of a so-called tribal payday loan program. Settlement resolves allegations of defendants’ alleged violations of the Unfair or Deceptive Practices (UDAP) provisions of the Federal Trade Commission Act (FTC Act), 15 USC § 45 (a), Telemarketing and Consumer Fraud and Abuse Prevention Act (Telemarketing Act), 15 USC §§ 6101-6108, FTC’s Telemarketing Sale s Rule (TSR), 16 CFR Part 310, the Truth in Lending Act (TILA), 15 USC §§ 1601-1666j, the Electronic Funds Transfer Act (EFTA), 15 USC §§ 1693-1693r, and its implementing regulations E, 12 CFR Part 1005.

In the complaint, the FTC alleged that payday lenders set up a fraudulent scheme to use deceptive marketing to convince consumers that their loans would be repaid in a fixed number of payments. Instead, payday lenders would have continued to withdraw funds from consumers’ bank accounts long after their loans were paid off. The FTC further alleged that these illegal withdrawals only stopped when consumers closed their bank accounts or found some other way to cut payments.

the regulation expects payday lenders to pay more than $ 114 million, part of which will be suspended due to inability to pay. As part of the settlement, payday lenders are required to forgo any outstanding consumer loans. In addition, payday lenders are permanently banned from the industry.

Huge gap in the supply of short-term loans

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The past year has seen the demise of more leading lenders in the short-term, high-cost lending industry. After Wonga’s capital loss in October 2018, more and more lenders have followed suit, including QuickQuid, WageDay Advance, 24 7 Moneybox and other well-known lenders are expected to follow suit.

Once prolific firms in the £ 2billion payday lending industry, many have suffered from tighter regulation by the Financial Conduct Authority and the mountain of claims from former clients.

Figures show 5.4 million payday loans were issued last year, but with lenders holding 80% market share now stopping trading, where are people going for short-term loans? ?

There is an increase in demand for loans around Christmas

High cost lenders will typically see double the volume of inquiries around December. Consumers will always spend more around Christmas on things like party lunches, gifts, going out, dating, etc.

Most employees earn their salary before Christmas, there is often a gap of six to seven weeks before they receive their next paycheck at the end of January. So not only do customers spend more, but they also have to wait an additional two to three weeks before getting paid afterwards.

“The biggest lenders have left the industry, 4 million Brits need loans and no one will lend to them. We have a real problem in our hands. “

Up to 1 million Britons will seek some form of payday loan or high cost loan to cover their cash shortage during the winter period.

But a problem arises. If they can’t borrow money, they risk accumulate new arrears for credit cards and other loans – creating a spiral and making it even more difficult to access finance in the future. There is also a risk of loan sharking and black market lending that may begin to manifest.

The role of small lenders and competitors

In theory, the absence of the UK’s biggest lenders should allow smaller lenders to thrive. However, it is not that simple in practice.

Most small lenders in UK do not have access to financing for millions of loans. If the 4 million customers need a loan of £ 400 each, we are considering additional funding of £ 160 million required, for an industry which currently lacks market confidence.

Likewise, for those who receive a larger influx of clients, they potentially incur much higher costs in terms of credit checking and underwriting, which is likely out of proportion to the amount of funding they can potentially lend.

Unfortunately, these small lenders are also subject to regulatory pressure and may not even find it profitable to operate any longer.

The rise of alternatives

To fill this gap in demand and overcome the failure of the payday loan market, a real alternative is needed that takes its place.

Many well-funded start-ups are already trying to seize this space. Some are tweaking the original loan model or using the client’s employer to provide more responsible funds.

This includes Wagestream, backed by VC, which allows clients to access their salaries at any time of the month. If you can’t wait for payday and need to pay your bills right away, you can access all the money you’ve earned, any day of the month, whether it’s the 10the, 15e or 20e of the month.

Innovate in the current credit model, Finance yourself offers a real alternative that offers short term loans of 2 to 3 months with no late fees and free extensions up to 12 months if the customer needs them. This avoids the issue of revolving credit and a debt spiral, often encouraged by payday lenders.

Neyber is a financial benefits tool that enables employers to offer low cost loans and provide financial education to their staff in terms of budgeting, investing and retirement.

AT Badger loans, customers looking for short-term loans are offered products based on their credit rating, whereby people with good credit will be offered unsecured or personal loans – and poor customers will be offered options from the guarantor and secured lenders.

With secured loans, the borrower can “bridge the gap” between large purchases or sales of real estate through bridging financing and specialized financial products. Already a mature industry led by companies such as Precise, Shawbrook and MT financing, this forces individuals to own property that they can use as collateral.

Beyond Christmas, what about the future?

The future of high-cost short-term and payday loans looks very bleak, with inevitably more lenders likely to pull out within the next calendar year.

That one of the alternatives mentioned will be able to dominate the market is yet to be confirmed, but new innovations in the industry are certainly welcome.

This could mean that traditional lenders overcome regulatory pressure by offering even more flexible repayment terms and tighter affordability controls.

Likewise, it could involve start-ups working closely with machine learning and AI companies in order to offer a different type of credit score and loan product.

Otherwise we will have huge numbers of people unable to access loans and a real problem on our hands.

Democratic senators Lambaste Kraninger for the CFPB salary plan

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Part of letter sent to Kraninger from CFPB.

The 47 Democratic senators accuse the CFPB of bowing to the payday lending industry in its proposal to allow lenders to grant loans regardless of the borrower’s ability to repay the loans.

And in a letter to the director of the CFPB, Kathy Kraninger, Senators raised the possibility that the agency’s decision violates federal law.

“Repealing this rule gives the payday lending industry the green light to tackle vulnerable US consumers,” the senators said in the letter.

Earlier this month, the CFPB proposed to eliminate the provision on repayment capacity of the agency’s 2017 rule governing payday loans.

This rule was issued by former director Richard Cordray, who was appointed by President Obama. When former acting office manager Mick Mulvaney, appointed by the Trump administration, took over the agency, he said the office would revise the 2017 rule. Kraninger has now proposed to eliminate the capacity requirement reimbursement.

Senators said the 2017 rule followed years of research. When the agency released the proposed revised rule, no additional research was cited, they said.

“Failure to do such research would not only imply dereliction of duty, but could also constitute a violation of the law on administrative procedures,” they said, asking Kraninger to send them any studies the agency had. conducted to justify the revised rule.

This act governs the process that federal agencies must use to issue rules.

While Democratic senators blasted the agency for this week’s decision, Comptroller of the Currency Joseph Otting hailed the decision, calling it “important and courageous.”

“The proposed rule allows lenders to re-enter the market with quality products and services that provide consumers with better regulated, priced and structured products,” he said.

Online Payday Loans Pose New Challenges For Consumers And Regulators | Local News

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Sutherlin says the law is still evolving on this issue, but adds “in this case it was clear they were doing business in Wisconsin.” This is one of the reasons they agreed to settle down.

As the industry spends a lot of money to thwart efforts to tighten state regulations and expand federal rules, which now only regulate loans to military families, the courts are a key arena where the practices of payday loans are disputed, according to the Center for Responsible Lending, an advocacy group with offices in North Carolina, Washington DC and California. For example, the North Carolina and Florida appeals courts have ruled that arbitration clauses in loan agreements like the one signed by Bernhardt do not prohibit consumers from suing lenders.

Sutherlin says internet court battles show that legislation should address the issues raised by online lending. The payday loan bill now before the Wisconsin Senate specifically mentions the Internet; this would require lenders operating in cyberspace to prominently display their Wisconsin license on their websites.

Orr also says it’s time to look at the specific regulations for online lenders, of which many have grown: “This really is the next frontier. On the one hand, she says, Internet loan providers should be required to obtain a license.

As Wisconsin lawmakers stumble toward caps on payday loan fees, 394 Wisconsin clients of Arrowhead are expected to receive a check in the mail. Payday loan users who can be traced and paid Arrowhead more than the original loan amount taken out between 2001 and 2007 will split $ 100,000. This is the maximum that a court can award as restitution in class actions under state law. Individual repayment amounts will be calculated based on how much is greater than their loan amount paid by customers, but no average amount is yet available, Orr says. The state will receive $ 30,000 for fines and assessments, and the legal clinic will receive $ 15,000 in legal fees. Outstanding loans from people in the class will be canceled and their credit scores adjusted.