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An Amen Chorus: Nevada Doesn’t Need H.R. 6139

Nor does any other state!  H.R. 6139 is a bill in the U.S. House of Representatives which would give predatory lenders all the latitude they need to put consumers on a debt treadmill at infinite cost to the consumer and almost limitless benefit to the lenders.  How this directly affects very real Nevadans is the topic of a MUST READ article by J. Patrick Coolican in the Las Vegas Sun.

After cringing at the descriptions in the article about what predatory lenders do to desperate customers, more gasps might be in order as we look deeper into what the bill would actually DO.

The Congressional Research Service summarizes part one of the bill:

“Requires a qualified nondepository creditor seeking a federal charter to submit an application which includes in part: (1) a business plan for at least a three-year period with its primary business activities serving underserved consumers and small businesses; (2) a market demand forecast, the intended customer base, competition, economic conditions, financial projections, and business risks; (3) a marketing plan that describes the types of financial products or services such creditor intends to offer; and (4) adequate capital structure.” (emphasis added)

Those two words, “federal charter,”  are the crucial part of the matter.  H.R. 6139 would allow predatory lenders to fall under the jurisdiction of the Comptroller of the Currency — the agency that supervises federally chartered banks.

What’s missing? State consumer protection laws — which the newly minted “federally chartered” lenders could circumvent by shuttling under the OCC jurisdiction.   Nevada has placed restrictions on predatory lending under the provisions of NRS 604A since 2007.  Section  NRS 604A.420 should be of additional interest: It prevents predatory lending to members of our Armed Forces, which would include Creech AFB in Indian Springs, NV; Nellis AFB in Clark County, and the Fallon Naval Air Station.   The state provisions define “high interest lending,” and prohibit making loans which amount to more than 25% of the individual’s gross monthly income.

By allowing the predatory lenders to slither under the OCC umbrella the bill would also protect them from oversight by the Consumer Financial Protection Bureau.

In its “Snapshot Report,” October 10, 2012 (pdf) the CFPB summarized the complaints it has received in regard to banking practices:

“Approximately 10,300 (86 percent) of bank account and service complaints have been sent by Consumer Response to companies for review and response. The remaining bank account and service complaints have been referred to other regulatory agencies (11 percent), found to be incomplete (3 percent), or are pending with the consumer or the CFPB (5 percent). Companies have already responded to approximately 9,800 complaints or 95 percent of the complaints sent to them for response. The median amount of monetary relief reported was approximately $105 for the approximately 2,500 bank account and service complaints where companies reported relief. Consumers have disputed approximately 1,900 company responses (20 percent) to bank account and service complaints.”

Thus we have a relatively new agency which has already received and processed some 10,300 consumer complaints, 1,900 of which are still unresolved.  This doesn’t sound like all the lending industry members are yet practicing “safe lending.”

The second major section of the bill is summarized by the CRS as follows:

“Directs the Comptroller to: (1) ensure that Credit Corporations focus their business operations primarily on providing underserved consumers a variety of affordable and commercially viable financial products or services, including some that facilitate personal savings and enhance the credit record of such consumers; (2) facilitate business partnerships among Credit Corporations, insured depository institutions, other nondepository creditors, third-party service providers and vendors, and nonprofit organizations in order to ensure greater credit access for underserved consumers and small businesses; and (3) examine and supervise the Credit Corporations.” (emphasis added)

Who are those “underserved consumers?” Many of them, as reported by Mr. Coolican, are in Nevada:

“Nevada leads the nation in the percentage of residents who are “underbanked” — meaning they have some sort of bank account but also resort to high-interest loans from nontraditional lenders to make ends meet. In theory, a borrower uses these services to tide him or her over until the next paycheck because he or she doesn’t have access to a bank loan or credit card. One-third of Las Vegas Valley residents use these services.” (emphasis added)

Riding the tide until the next paycheck could be a problem for those who would be at risk of being “sold” a pay day loan greater than 25% of their gross monthly income should that protection by the State of Nevada no longer be available to them.  Nor could these “underbanked” individuals and families count on the State to protect them from pay day lenders who want to issue multiple loans.

And Nevadans aren’t alone, although 7.5% of Nevada households are unbanked, and another 31.2% are underbanked.  This, as Coolican notes, puts  us in the Dubious Category of Number One in the Nation in underbanked persons.  [FDIC pdf]  8.2 percent of US households are unbanked. This represents 1 in 12 households in the nation, or nearly 10 million in total.  20.1 percent of US households are underbanked. This represents one in five households, or 24 million households with 51 million adults. [FDIC pdf]  Which brings us to the part of the bill which is supposed to make us feel better.

“Requires Credit Corporations to make available to each consumer to whom a financial product or service is being offered: (1) information on how a consumer may obtain financial counseling services, the benefits of following a regular personal savings program, and how consumers can improve their credit ratings; (2) disclose clearly and conspicuously in the loan agreement the true cost of the loan, including all interest, fees, and loan related charges; and (3) offer an underserved consumer who is unable to repay an extension of credit with a loan repayment term of less than 120 days, an extended repayment plan, at no cost to the consumer, at least once in a 12-month period.”  [CRS]

Not. So. Fast.  The Center for Responsible Lending research found that —

“Although marketed and advertised as a quick solution to an occasional financial shortfall, the actual experience of payday loan borrowers reveals there is nothing quick about the loan except its small principal. According to new CRL research that tracked about 11,000 payday borrowers over two years, many borrowers remained indebted for the 24 months that followed their initial loan.”

The lending isn’t quick, it isn’t inexpensive (with rates up to about 400%), and it is borderline pathological.   Credit counseling is fine — depending upon who does the counseling.  Even adequate credit counseling should put off the borrower from even considering a pay day loan.  Disclosing the true cost of the loan is fine — but it may very well NOT prevent the individual from taking on more debt in subsequent transactions.  Further, an extended re-payment plan for one loan does nothing to ease the pain of the subsequent ones.

There is one more thing we should notice about H.R 6139 — the enthusiasm for placing the predatory lenders under the jurisdiction of the OCC (which doesn’t want it).

Why?  Because the Consumer Financial Protection Bureau is tasked with handling consumer complaints about predatory lending practices, and has a special section dealing with the issues affecting military families and their  lending or home ownership issues.   AND because the Federal Deposit Insurance Corporation created the Division  of Depositor and Consumer Protection in August 2010.

“The establishment of a new division dedicated to depositor and consumer protection will provide increased visibility to the FDIC’s compliance examination and enforcement program. That program ensures that banks comply with a myriad of consumer protection and fair lending statutes and regulations. While Congress established the new bureau to promulgate consumer protection rules, the FDIC maintains the responsibility to enforce those rules for banks with $10 billion or less in assets and to perform its traditional depositor protection function.” (emphasis added)

And, there we have it. The FDIC has a new initiative to regulate the activities of lending institutions under its jurisdiction to curtail predatory lending practices, and the CFPB is tasked with restraining predatory lending practices, so … the only regulatory agency remaining would be the Office of the Comptroller of the Currency which oversees nationally chartered banking institutions.

The bill now sits in the House Subcommittee on Financial Institutions and Consumer Credit to which it was referred on October 1, 2012.  It should stay there.  Forever. And ever. Amen.

 

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Filed under Economy, financial regulation, Nevada economy, Nevada politics

Sharks in the Financial Waters: The Big Banks Play With Predatory Lending Practices?

Nothing will send the Beacon’s beam flashing faster than predatory lending practices.  NRS Chapter 604A is supposed to protect Nevadans from predatory lending in the state.  However, the statutes don’t prevent the issuance of high interest loans, defined by the state as a loan which has an annual interest rate above 40%.  Failing the outright proscription of these loans, the state (and the federal government for that matter) ought to be taking a harder look at predatory lending practices.

One reason for additional scrutiny of PayDay lending is that customers can get “churned” into the system.  Churning happens when the borrower can pay off the principal, but the interest charges are such that the individual needs yet another loan to make it to the next payday.  Such “churning” has drawn attention when practiced by Street Corner operations, but now we find some of the major banking institutions engaging in the process.

The Center for Responsible Lending, bete noir of the American Bankers Association, reports (pdf) that at least four major banking institutions are now engaging in making payday loans directly to their customers.  The bank lends to the customer by depositing the amount directly into the customer’s checking account — and then makes withdrawals just as directly from the account — even if this causes a negative balance.  The full CRL report (pdf) explains:

“This “debt treadmill” is created by the structure of the loan itself. Repayment in full from a single paycheck or benefits check is a tall order for a household already living close to the financial edge. Borrowers routinely find themselves unable to repay the loan in full and the fee plus meet their monthly expenses; so shortly after repaying the previous loan, they require another loan. Ultimately, this series of so-called “emergency, short-term” loans is essentially long-term debt carrying annual interest rates averaging 417 percent and leading to a host of negative financial outcomes for borrowers.”

And the treadmill continues when a customer approaches on of the major banks which offer “deposit advance programs”:

“The bank deposits the loan amount directly into the customer’s account and then repays itself the loan amount, plus the fee, directly from the customer’s next incoming direct deposit. If direct deposits are not sufficient to repay the loan within 35 days, the bank repays itself anyway, even if the repayment overdraws the consumer’s account, triggering more fees. These loans are structured just like loans from payday shops, where borrowers typically are stuck in multiple payday loans per year—usually in quick succession and with a new fee each time, because they cannot afford to repay the loan in full, plus the fee, and meet ongoing expenses. So shortly after repaying the previous loan, they require another loan.”

The process described above is a perfect example of “churning.”  The Chicago Sun Times notes that the bankers are attempting to put some daylight between themselves and the street corner payday lending operations, but that the result for the consumer can be essentially the same. The Sun Times reports that Wells Fargo, US Bank, and the Fifth Third Bank are all “offering” payday lending in some form.  MSN Money adds that Regions Financial has entered the lists as well.

When the Office of the Comptroller of the Currency issued guidance for “Deposit Related Consumer Credit Products” in June 2011, [Treas. pdf]  the ABA pushed back. Its August 4, 2011 letter to the OCC complained that the proposed regulations were “onerous,” one of the standard complaints in the bankers’ lexicon of laments, and that they would cause “confusion,” another common complaint in that well thumbed catalog.  The bankers wrote: “In reality, direct deposit advance programs enable customers to live within their means by permitting them to manage the timing of the receipt of those means.”   Managing the timing is one thing, managing the process is another, because in the next statement the bankers admit that what they are really doing is the same thing as the Street Corner payday lenders:

Customers understand that deposit advance programs are the functional equivalent of receiving an advance on income or other regular deposit. Thus, when the recurring deposit actually occurs, the balance not previously advanced is credited to the account. In other words, the normal, recurring payment is bifurcated into an accelerated portion (the advance), and the remaining balance received on schedule less the fee for taking the advance. When a person goes to his or her employer for an advance on their salary or commission payout, the obliging employer naturally pays only the balance (regular periodic earnings less the advance) on the scheduled pay day. The bank that offers a deposit advance program is behaving similarly, but as a third party, the bank charges a fee for the accommodation.” [ABA pdf] (emphasis added)

In short, the bank will “accommodate” the customer for a fee, just like the boys on the corner at the strip mall.

The Center for Responsible Lending has some pertinent recommendations which might serve to prevent this latest rapacious foray from the banks:

(1) Let the regulators regulate.  If the Federal Regulators were once willing to prevent banks from combining with the Street Corner Payday lending shops as they once were, then the regulators should go to the next logical step and prevent the banks from entering the payday lending business, or as they are wont to call it the “deposit advance” business.

(2) If the aforementioned step isn’t in the offing, then at least have a moratorium on bank “advance deposit” programs until information from the banks is (a) made public and (b) collated into manageable data for the purpose of analyzing the ramifications of these programs.

(3) Allow customers to repay the loans (deposit advances) in installments, and improve the underwriting standards such that a customer can reasonably expect to repay the loan without having to take out yet another deposit advance.

The Consumer Financial Protection Bureau, which the bankers and their allies in Congress would very much like to (a) repeal, (b) leave unfunded, and (c) emasculate in any way possible, will be the agency charged with supervising payday lending.  Thus:

(4) The Consumer Financial Protection Bureau should move as quickly as possible to collect data on the extent and the impact of payday lending (both by the Street Corner operations AND the major banks), and to restrict as much as possible the negative impact these practices have on working families.

Lest the Bankers believe that only organizations like the Center for Responsible Lending are posing questions about the impact of their Deposit Advance “products,” the Pew Center has weighed in as well, calling on the OCC to require the disclosure of “the costs of deposit advance accurately, by expressing the finance charge as an annual percentage rate calculated under the Truth in Lending Act, and warning borrowers about the likelihood of renewal.”  [Pew pdf]*

Banks may also want to remind themselves of what the FDIC told them back in 2005:

“Most payday loans have well-defined weaknesses that jeopardize the liquidation of the debt. Weaknesses include limited or no analysis of repayment capacity and the unsecured nature of the credit. In addition, payday loan portfolios are characterized by a marked proportion of obligors whose paying capacity is questionable. As a result of these weaknesses, payday loan portfolios should be classified Substandard.”

We, each and every one of us, may also want to remind ourselves what happens when soaring levels of household indebtedness are combined with the creativity in the financial markets and the capacity of banks to slather risk — subprime, substandard, or whatever we wish to call it — in order to secure rosy earnings reports.    If a category is “substandard” for a third party, it is “substandard” if kept on the banks books as well.

It really is time to stop this loop.

*Notes: OCC commentary CRL, CFA, NCLC on 26 Federal Register 33409 (June 8, 2011) pdf.  Pew Charitable Trusts, OCC 2011-0012 “Guidance on Deposit Related Consumer Credit Products,” pdf.  FDIC (2005) “Guidance for Pay Day Lending.”

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