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Law professor exposes weakness in NY Times article on auto equity lending

Law professor exposes weakness in NY Times article on auto equity lending

George Mason University law Professor Todd Zywicki has written a compelling counter to a New York Times story on auto equity lending that was published Christmas Day.

Writing on The Volokh Conspiracy blog, which was posted on The Washington Post website, Zywicki does an outstanding job pointing out the fallacies, weaknesses and bias of the article with a full dissection of the arguments made in the story.

“As I have illustrated previously,” Zywicki writes, “The New York Times has come completely off the rails when it comes to ‘news’ coverage of consumer credit issues. Indeed, it appears that the paper is not even making an effort to distinguish news reporting from editorializing, as its Christmas Day article, “Rise in Loans Linked to Cars Is Hurting Poor” indicates. (The title in the url is equally suggestive — “Dipping into auto equity devastates many borrowers.”).

You can the entire blog post here:

http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/12/29/nyt-on-auto-title-pawns/

Briefly, here are the major points Zywicki makes in the post:

  • Those who use auto title equity loans have limited options;
  • Consumers use auto title equity loans for pressing expenses;
  • Auto title equity loans provide limited risk of financial breakdown;
  • The risk and consequences of repossession are not as extreme as might be supposed:
  • Consumers generally understand the costs and risks.

“At root, the fundamental problem with The New York Times’s article is that people are not as stupid as the Times reporters think that they are,” Zywicki writes. “Consumers use (auto equity loans) for a variety of complex reasons and those who use these loans typically do so because they are better than the alternatives – eviction, utility cutoffs, or the like.”

It is refreshing, and frankly rare, to read a fair and balanced article on our industry, members and products let alone a full-throated defense of the services we provide to consumers.

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Study finds payday loan rollovers do not harm borrower’s financial welfare

Study finds payday loan rollovers do not harm borrower’s financial welfare

A study was released last Tuesday by Kennesaw State University’s Center for Statistics and Analytical Services on the effect payday loans have on a consumer’s financial welfare. The study, which examined the transactions of 37,000 borrowers over a four-year period, found no adverse relationship between repeated refinancing of payday loans and the borrower’s credit score.

Additionally, the study also found that borrowers who live in states with fewer refinancing restrictions are better off than those in more heavily regulated states.

Key findings from the report include:

  • Borrowers who engaged in protracted refinancing (rollover) activity had better financial outcomes (measured by changes in credit scores) than consumers whose borrowing was limited to shorter periods.
  • Borrowers experienced a net positive financial welfare impact when they faced fewer regulatory restrictions on rollovers. State-law limitations on rollovers appeared to contribute to adverse changes in credit scores for borrowers.

Read the full study here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2534628

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The hidden costs of governmental regulation

The hidden costs of governmental regulation

Law professor and author Todd Zywicki has been a longtime vocal critic of the Consumer Financial Protection Bureau (CFPB). “When it comes to consumer credit, Washington’s approach is to wish away unintended consequences,” the author told ThinkAdvisor.

The problem, Zywicki believes, is that the government has a tendency toward “market-replacing regulation.” They want to eliminate certain products or create entirely new product categories. What the government can’t change, though, is consumer demand, and there is an undeniable need for payday loans or short-term consumer credit.

If the government regulates payday lenders out of business, the demand for payday-like products still exists, and it’ll find its outlet elsewhere; with online or offshore lenders, for example. A better solution, Zywicki says, is to create regulations that are “market-reinforcing.” That is, create regulations that increase rather than decrease competition and thereby promote consumer choice.

“We need to respect consumers as grown-ups,” Zywicki concludes. “Recognize that consumers make mistakes, but understand that people know better what to do with their lives than well-intentioned bureaucrats.”

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Effects of ‘Operation Chokepoint’ far-reaching

Effects of ‘Operation Chokepoint’ far-reaching

Operation Choke Point is garnering headlines for impelling banks to close accounts controlled by legal businesses like gun shops, short-term lenders and fireworks dealers. The effects of this governmental pressure could be more far-reaching than we realize.

“The end result of the government’s action (is) the remaining financial institutions used by underserved consumers may no longer be available,” writes the editorial board at the Milwaukee Courier.

That’s because some banks have chosen not to serve low- and middle-income communities, or they have overpriced many of their vital services like checking accounts. That means check cashers, bill payment centers and payday lenders now fill a role for consumers who have chosen not do business with banks, can’t afford to, or have chosen to severely limit the amount of business they are willing to conduct.

While we can’t know the ultimate intentions behind Operation Chokepoint, we do know that it threatens legal businesses and could cut off access to credit for a large swath of the population.

“The policy is ill-advised,” the Courier writes. “The tactics are thuggish. The results are devastating. We urge the Administration to stop Choke Point’s focus on legitimate companies providing access to financial services in underserved communities.”

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Can the USPS beat short-term lenders? No, scholars say

Can the USPS beat short-term lenders? No, scholars say

In January, the U.S. Postal Service Office of Inspector General proposed that the USPS start offering financial services to the “underserved.” Bill payments, small loans and money transfers are among the proposed offerings. The Cato Institute’s Mark Calabria takes on the proposal in a recent blog post. Opponents believe “the USPS could offer payday ‘without taking nearly as big a cut,'” he writes.

Now “big” is subjective but scholars have examined this question. In research reported in 2012 in Regulation, UC-Davis Professor Victor Stango compared the performance of traditional payday loans to those offered by credit unions. Some of his conclusions: “there is little to suggest that credit unions can offer a payday loan with competitive terms. Existing credit union payday loans often have total borrowing costs that are quite close to those on standard payday loans.” Maybe the USPS has a better cost structure than the typical credit union, but that seems unlikely as the USPS isn’t exactly known for its efficiency.

Professor Stango also reports survey evidence that payday borrowers highly value the convenience of payday lender’s hours and locations. Yglesias doesn’t address this, but last time I went to a Post Office, the hours were about as convenient (or less so) than that of a traditional bank. And of course USPS isn’t exactly known for its consumer friendly approach. In all, it seems highly unlikely that without a major revamp and cultural change that the USPS could be a serious competitor to payday. Perhaps as important, the USPS would likely be viewed as “too big to fail”, so that allowing USPS to make high risk payday loans could easily result in a taxpayer bailout. Getting USPS into payday makes about as much sense as getting Fannie Mae into subprime mortgages.

Oh wait, we did that.

Read more at the Cato Institute. Photo by Vasti_Krug.

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Capping rates and fees does as much harm as good

Capping rates and fees does as much harm as good

The editorial board at the Brownsville Herald in Texas penned an illuminating editorial yesterday that echoes arguments we’ve long made about the short-term lending industry: interest rate and fee caps don’t work. Instead, the caps effectively render short-term lenders unprofitable, forcing them to close up shop, cutting off access to credit for a large swath of consumers.

From the editorial:

“Researchers at the University of Washington’s Evans School of Public Affairs have studied the issue, seeking to learn what happens to borrowers when payday loans and other short-term credit is restricted.

“They found that such lenders don’t lower their rates; they leave the market, making loans less available for those who need them. Perhaps surprisingly, the study found that profits aren’t high on such loans. The cost of providing short-term credit is higher, return on smaller payments is lower, and default rates are higher.

“Default rates drive interest rates; the higher the risk the higher the rate.

“The study also found that regulations don’t help borrowers. Without short-term loans they raise emergency cash by pawning items, paying bills late and using bank overdraft services. High fees on these services compare to the cost of payday loans.

“The study’s conclusion: ‘Household financial security does not necessarily improve after payday lending is prohibited through rate and fee ceilings. …'”

Read more at BrownsvilleHerald.com. Photo by svilen001.

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CFPB releases updated complaints data

CFPB releases updated complaints data

A new report from the Consumer Financial Protection Bureau indicates a relatively low volume of complaints leveraged against the short-term lending industry – and the bulk of those complaints are levied against online lenders. Between July 21, 2011 and June 30, 2014, the CFPB received approximately 395,300 consumer complaints. Just 1% of those complaints addressed “payday lending”:

CFPB complaints

Mortgage lending, debt collection and credit cards were the three most active complaint categories over the past three years. Within the “payday lending” category, online loans generated nearly two-thirds of all complaints:

types-of-loans

Those complaints were broken down into the following categories:

types-of-complaints

The CFPB’s complaint statistics reinforce our long-standing position that consumers should be wary of non-OCLA member online lenders (particularly off-shore or out-of-state lenders). When possible, obtain a loan in person at a brick-and-mortar store where a representative can help you answer any questions, explain rates and fees, and ensure you understand the terms of your loan. Always ensure you’re doing business with OCLA member. Our staff can work with you and our member companies to resolve any issues that may arrive. Please call (866) 595-1301 for assistance.

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Journal article details misconceptions about short-term loans

Journal article details misconceptions about short-term loans

Ronald L. Rubin of Hunton and Williams LLP offers up several poignant points about the short-term lending industry in an article that ran in the Wall Street Journal this week:

The CFPB wants to keep payday loans available to people who repay them quickly and deny the loans to those who don’t. That may sound reasonable, but as is the case with credit cards, rejecting profitable borrowers while lending to unprofitable ones is not a viable business. Payday lenders would be forced to charge even higher interest rates or shut down. Either outcome would limit access to credit, contrary to the CFPB’s official mission.

The CFPB should only create programs to educate consumers about payday loans, pass regulations to ensure that lenders follow existing laws and prosecute businesses that don’t treat borrowers honestly. The Dodd-Frank law requires these actions, and no more. The CFPB wasn’t created to protect consumers from themselves.

Read the full article here.

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Customers choose wisely between overdrafts and short-term loans

Customers choose wisely between overdrafts and short-term loans

bankThe average fee for a short-term loan is straightforward: $15 per $100 borrowed. Contrast that with overdraft protection, which typically costs $27-$35 regardless of the size of the overdraft. Since overdraft protection can be used to cover immediate cash shortages, they do, in effect, compete with short-term loans.

“If consumers are rational, they will tend to use payday loans to cover smaller bills and overdraft protection to cover larger bills,” writes the Washington Post. “Sure enough, an ingenious study by Brian Melzer and Donald Morgan find exactly that result.”

It’s an interesting finding that demonstrates rational behavior on the part of consumers. It also points out the fact that in states where short-term loans are banned, overdraft protection typically remains unregulated and serves as a proxy for short-term loans.

Consumers can and should be allowed to choose from a range of borrowing options. Competition helps lower fees, and that’s better for all borrowers. In the words of Todd Zywicki of the Post:

“Regulators cannot wish away the need of low-income consumers for credit. … Congress can pass all the laws it wants, but it can’t repeal the law of supply and demand and the law of unintended consequences.”

By restricting short-term lending, lawmakers may unwittingly be taking away an option that can save consumers money. That’s bad for consumers, and it’s a key education point that the OCLA is committed to sharing with legislators and the public.

Photo credit: Phaser4.

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Industry Employee of the Month: Chris

Industry Employee of the Month: Chris

OCLA interviewed Chris, a manager in the short-term lending industry in Mt. Vernon, Ohio in March 2013. Here’s a transcript from the interview:

What do you like about your job?

What I really like most about working for Advance America is being able to help my customers. When my customer pays their loan off, and they say ‘Thank you for helping me,’ that really is satisfying.

What types of benefits do you receive?

We have good benefits: health insurance, we’re able to invest into 401Ks, the pay is good. It’s nice to have a steady income that we can rely on.

Has there been a specific time where these services have helped someone in a crisis?

Yeah. I had an older fellow during my first year coming to work here. He came up from Florida during the summer living with his family with his wife, and she got very ill. And he came in here almost in tears. He needed money for her medication, and we were able to loan him. He had been a customer before he moved to Florida, and so it was just a matter of updating him. Then, when he came and paid it back the next month, again in tears and just saying ‘Thank you so much. If it wasn’t for you, I don’t know if my wife would have survived.’ That, quite honestly, is the most fulfilling thing I can think of.

Do you feel you are upfront and transparent with charges for services?

Yeah. We tell everybody this is what the loan is, this is how much it’s going to cost you, this is what the payback is and you’re due on this day. We even go so far as to let them know if there are any late fees involved. We just make sure that they understand that when they’re getting a loan, what they’re getting, and how much it’s going to cost them in the end.

Can you share a time when you were able to protect a customer from becoming a victim of fraud?

We get customers all the time who say, ‘I got this letter,’ and they bring it in, we look at it, and we’re able to tell them, ‘You know, this type of fraud is going on.’ We had a lady come in last summer, and she was trying to send $3,000 to Canada because her grandson was in jail in Canada, and that’s a typical scam that people are doing – getting asked to send money to the grandson you haven’t seen in 10 years. We were able to not send that for her and save her money.

What do you think would happen to the local economy if these services were eliminated?

I think it’d be pretty tough on folks because for a lot of people, this is their only resource. We have customers who come in and say ‘Thank you for being here, I don’t know what I would have done without you.’ Those aren’t folks who have other traditional means to turn to. They have to come to a lender like us or they’re not going to get the help they need. When you need a $300 brake job done, and you don’t have someone to turn to for that, we can do a $300 loan for almost any person who walks in the door, and they can get their brakes fixed. Otherwise, they’re not going to work tomorrow.

What would you say to those people trying eliminate these services?

If they eliminate these services, you’re going to see higher bankruptcies. That happened in Oregon. That happened in North Carolina when that took place there. They’re going to see people with no place to turn to, and it’s just going to cause legitimate hardship for people. If we keep the services, they have some place to turn to. We are a very ethical lender. We take care of our customers.

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