THE BLOG

20
Feb

More Stupid Things Lenders Do

Stupid things payday lenders doMore Stupid Things Lenders do.

John Q. called me this morning. He owns a payday loan and car title lending store. He wants to “tighten up” his operation and open 3 more locations. I advised him to get a loan at “your biggest, baddest competitor in your market in order to copy and emulate their contracts, disclosures, licensing, and sales pitches.” In the past, this advice USUALLY helps. BOY DID I SCREW UP! Turns out John’s “biggest, baddest competitor” was CashCall operating in California. 

PRESS RELEASE DEPARTMENT OF BUSINESS OVERSIGHT

Lender CashCall to Pay Restitution, $1 Million in Penalties and Costs to Settle Case with DBO

SACRAMENTO – The Department of Business Oversight (DBO) announced a settlement with CashCall, Inc. that requires the lender to provide restitution to thousands of California borrowers, reform its business practices, and pay the DBO $1 million in penalties and cost reimbursement.

The DBO alleged CashCall used deceptive sales pitches and marketing practices to dupe consumers into taking out personal loans of $2,500 or more even though the customers didn’t need or want to borrow that much money. Here’s how the alleged scheme worked:

  1. In ads, CashCall said it provided personal loans of “up to” $2,600, $5,000 or $10,000. But when consumers called or visited CashCall’s website, they were told the firm did not make loans of less than $2,600.
  2. If consumers informed CashCall they wanted a loan of less than $2,600, CashCall told them they could just give back the amount they did not want in the form of a prepayment. That way, CashCall told consumers, they could net substantial savings on interest payments.
  3. However, CashCall failed to tell consumers that since the loan was for $2,600, the firm could charge unlimited interest rates. On loans of less than $2,500, in contrast, state law generally caps interest rates at about 30 percent. On the loans at issue, CashCall typically charged annual interest of 135 percent or more, and sometimes up to 179 percent.
  4. To make matters worse in these cases, the DBO alleged CashCall often failed to withdraw scheduled monthly payments from customers’ bank accounts. That had the effect of lengthening the loan term and reducing any interest savings.

“CashCall engaged in a large-scale predatory lending scheme,” said DBO Commissioner Jan Lynn Owen.

“This settlement holds the company accountable for its unlawful conduct and compensates the victims of these unscrupulous practices.”

The settlement resolves allegations filed by DBO last year that CashCall unlawfully deceived consumers, filed false reports with the Commissioner and made false representations to the Commissioner.

CashCall will pay wronged borrowers $125 each in restitution. The final number of eligible borrowers and the ultimate restitution total will be determined by a third-party auditor who will examine CashCall’s files.

CashCall’s preliminary review of its files indicates thousands of customers will receive restitution. CashCall must make the restitution payments within 90 days.

State law caps interest rates on consumer and commercial loans made by non-bank lenders. But the limits only apply to loans smaller than $2,500. The law imposes no interest rate restrictions on loans of $2,500 or
more.

To prevent similar violations in the future, the settlement requires CashCall to reform the way it conducts business.

In all ads that market non-mortgage and non-auto loans to Californians, CashCall now will disclose in a “clear and conspicuous manner” that the minimum loan amount is $2,600. Additionally, when customers say they want to borrow less than $2,600, CashCall now will have to tell them the firm does not make loans for less than that amount, that state law caps interest rates on loans of less than $2,500 at about 30 percent, and that the capped rate is lower than the rate CashCall charges. The firm will implement additional consumer protection reforms required by the settlement agreement.

Link to original press release: DBO

Guys, this is just plain stupid if true. Maybe CashCall decided it’s cheaper to pay the mickey-mouse fine rather than litigate. Who knows! Just don’t do stupid stuff!

11
Feb

Two New Payday Loan Studies Reveal Merits

“Two new Payday Loan Studies Cast Doubt on Need for New CFPB Rules for the Payday Loan Industry.”

Two new payday loan studies were issued recently whose results “fly in the face” of the standard “muck” thrown about by the CFPB, the CRL and the DOJ .

1) A Columbia Law School Professor, Ronald Mann, released a study entitled, “Do Defaults on Payday Loans Matter?” Professor Mann compared the credit score change over time of borrowers who default on payday loans to the credit score change over the same period of those who do not default.

His study revealed:

  • Professor Mann’s study revealed credit score changes for borrowers who default on payday loans differ immaterially from credit score changes for borrowers who do not default.
  • The fall in credit score in the year of the borrower’s default overstates the net effect of the default because the credit scores of those who default experience disproportionately large increases for at least two years after the year of the default.
  • The payday loan default cannot be regarded as the cause of the borrower’s financial distress since borrowers who default on payday loans have experienced large drops in their credit scores for at least two years before their default.

Professor Mann’s findings “suggest that default on a payday loan plays at most a small part in the overall timeline of the borrower’s financial distress.” He further states that the small size of the effect of default “is difficult to reconcile with the idea that any substantial improvement to borrower welfare would come from the imposition of an “ability-to-repay” requirement in payday loan underwriting.”

2)Kennesaw State University Professor of statistics and data science, Jebnnifer Lewsi Priestly, released a second study entitled, “Payday Loan Rollovers and Consumer Welfare.” Professor Priestley evaluated the effects of sustained use of payday loans.  She concluded that borrowers having a higher number of rollovers experienced more positive changes in their credit scores than borrowers with fewer rollovers.  She observes that such results “provide evidence for the proposition that borrowers who face fewer restrictions on sustained use have better financial outcomes, defined as increases in credit scores.” [My dear readers, this is HUGE!]

According to Professor Priestley, “not only did sustained usage not contribute to a negative outcome, it contributed to a positive outcome for borrowers.” She also notes that her findings are consistent with findings of other studies that because consumers’ inability to access payday credit, whether generally or at the time of refinancing, does not end their need for credit, denying access to original or refinance payday credit may have welfare-reducing consequences.

Professor Priestley also found that a majority of payday borrowers experienced an increase in credit scores over the time period studied.  However, of the borrowers who experienced a decline in their credit scores, such borrowers were most likely to live in states with greater restrictions on payday rollovers.   She concludes her study with the comment that “despite several years of finger-pointing by interest groups, it is fairly clear that, whatever the “culprit” is in producing adverse outcomes for payday borrowers, it is almost certainly something other than rollovers—and apparently some as yet unstudied alternative factor.”

Now the question for you, Reader: Will these two academic reports be considered by the fine regulators at the CFPB? Will these reports see the light of day? Or will our opponents: the banks, the credit unions, CRL, pawn, BHPH, RTO… overshadow our efforts with lobbying and political contributions that exceed ours? Will our 14M+ clients jump in the frey and tell the CFPB to “Let our people be free to choose?”

U.S.residents are hoping the CFPB gets this right. A loss of access to small dollar credit products would have a devastating effect on our economy. Families unable to borrow a few hundred dollars to buy medicine, fix the car in order to keep their job, or buy some groceries to last until the end of the week will not be better off than they are today.

We have little expectation that the CFPB will consider these studies.  It’s a shame the CFPB has not had the wherewithal to launch their own research studies.    A data driven regulator as our expectation. It appears this may not be the case. Too bad!

Jer@PaydayLoanIndustryBlog.com