From the Business Courier of Cincinnati:

The move follows the rejection by voters of Issue 5, a referendum sponsored by the payday lending industry. The issue, if passed, would have repealed a recently enacted state law limiting interest rates the industry can charge to 28 percent, versus the previous annualized rate of 391 percent.

The day after the Nov. 5 election, Fort Worth, Texas-based Cash America International Inc. announced that it would shut down 43 of its 140 shops in Ohio.

“Unfortunately, as we communicated throughout the campaign, operating under the restrictions set forth in House Bill 545 is not an option,” said Doug Clark, chief operating officer for Check 'n Go, in the release.

In case you were not aware, pay day lending is a form of evil.

Check 'N Go closing 36 Ohio sites [Bizjournals] (Thanks, Nick!)
(Photo: u2acro )

We thought one detail worth sharing with anyone who will listen is that some title lenders will disclose a monthly interest rate instead of an annual one, even though legally they're required to publish the APR. For borrowers who don't know any better, a 25% monthly interest rate doesn't sound that bad compared to many mid- and low-end credit cards these days, until you multiply that by 12 and realize your APR would be three hundred frickin' percent.

"Why car title loans are a bad idea" [AOL Autos | CNN]
(Photo: Photog*Phillip)

"We will not tolerate individuals being exposed to exorbitant rates, which does contribute to the cycle of indebtedness," Strickland said. In the past decade, payday lending in Ohio has grown from a few hundred stores to over 1,600. The bill will likely cause most of these stores to close and 6,000 people to lose their jobs. Ohio says these jobs aren't worth keeping:

"We want to replace jobs that are taking advantage of people with jobs that help people," said Ohio Senate President Bill Harris, an Ashland Republican.

The payday lenders were predictably angered by the bi-partisan effort to run them out of the state. A spokesperson for the Community Financial Services Association claimed that Ohio's citizens had been betrayed:
"It is a sad day when the opinions of editorial writers and so-called consumer groups count for more than the opinions of the people responsible for putting lawmakers in office," wrote DeVault.

The industry is trying to repeal the law with a signature campaign. According to the Plain Dealer they'll need "241,375 valid signatures across 44 counties in the state in the next 90 days."

Gov. Strickland signs payday loan limit [The Plain Dealer]
(Photo: DCVision2006 )

"It was really every sleazy move in the book," says NPR's tipster, an economic analyst turned stay-at-home Mom who has owned several homes in the past and who is married to a mathematician.

NPR's tipster says that when she told the Countrywide loan officer that her income was low because she was a stay at home mom, he told her that she could lie about husband's income because he had "manager" in his job title.

"He said he could change it and if it was a manager then the underwriters wouldn't be as questioning. And I said but our taxes don't reflect it and his boss will not verify that that is indeed his income, and basically he said: 'Don't worry about it. I'll deal with it.'" She also says that the loan officer asked her to create an entirely fraudulent document claiming that she made $60,000 a year when in fact she was not working.

"I told him that I was extremely uncomfortable doing it, and I didn't want to," she said.

Countrywide says it is looking into the incident.

Woman: Countrywide Proposed Fibbing to Get Loan [NPR] (Thanks, Tmoney02!)

A provision in the Arkansas state constitution limits the allowable interest rates on loans and consumer credit transactions. According to Article 19, Section 13, the maximum allowable amount for general loans "shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract." Any contracts that charge higher interest will be void as the interest. The consumer loan provision is even better: "All contracts for consumer loans and credit sales having a greater rate of interest than seventeen percent (17%) per annum shall be void as to principal and interest and the General Assembly shall prohibit the same by law." Payday lenders have apparently been operating under an industry-written "Arkansas Check-Cashers Act" that called payday loan interest rates "fees," exempting them from the usury provision and allowing lenders to charge interest rates "fees" of up to 300 percent. The Arkansas Supreme Court has issued several rulings holding parts of the law unconstitutional and labeling payday lending as "unconscionable and deceptive," and appears to have McDaniel's back. In response, the payday lending association in Arkansas spouted the typical "Hey, at least it's better than paying overdraft fees and pawning your wedding ring" line.

AG McDaniel Orders Payday Lenders to Cease Operations or Face Action [Arkansas Business]
Arkansas Constitutional Provision on Maximum Interest Rates [Arkansas Secretary of State]
(Photo: ninjapoodles)

The law bars the government from sending a recipient's benefits directly to lenders. But many of these lenders are forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.

As a result, these lenders, which pitch loans with effective annual interest as high as 400% or more, can gain almost total control over Social Security recipients' finances.

One former payday lender employee says he was tasked with recruiting the elderly to come in for loans:

Mr. Harrod was a manager of a Check 'n Go store across the street from Fort Lincoln Senior Citizen's Village, a subsidized-housing complex for the elderly and disabled in Washington, D.C. Mr. Harrod says he was encouraged by his supervisors to recruit the elderly, and did so by often eating his lunch on nearby benches to strike up conversations with the complex's residents. According to Mr. Graves's analysis, there are at least four payday lenders within a mile-and-a-half of Fort Lincoln.

Like many payday borrowers, Mr. Hummel realized he couldn't pay off the loan when it was due so he went to another "payday" lender. Lenders rarely ask about other loans and debt, and borrowers often take out multiple loans in an effort to avoid defaulting. By February, Mr. Hummel had eight loans from eight lenders, at effective annual interest rates that ranged from 180% to 406%.

There should be a lender's prison, perhaps.

(Thanks to Diana!)

"High-Interest Lenders Tap Elderly, Disabled" [Wall Street Journal]
(Photo: Getty)

The lender stopped taking loan applications Aug 1st and its assets (including $45 billion of loans) were sold to Citigroup late last month.

Last year Ameriquest agreed to pay $325 million in a multistate class-action settlement over claims of deceptive lending practices which included failing to disclose that the loans had adjustable rates, failing to disclose the terms of the loan, refinancing homeowners into inappropriate loans, inflating home appraisals, and charging excessive fees such as prepayment penalties and loan origination fees. Ameriquest did not admit wrongdoing.

Earlier this year a number of former Ameriquest mortgage brokers spoke to NPR, detailing the steady diet of corruption that led to Ameriquest's downfall. Commonplace tactics included "sending papers to the Art Department," a term that was code for forging w2s in order to qualify consumers for loans they couldn't afford.

If consumers qualified for a fixed rate mortgage, they often told that their mortgages were fixed for "as long as they wanted" when in reality, they were only fixed for 2 years. In order to fool the applicants into signing up for the pricier loan, fixed rate mortgage papers were stacked on top of variable rate ones. After tricking the customer into signing all of them, the fixed rate papers were discarded.

There is a little bit of a happy ending to the story: If you were defrauded by Ameriquest, you may have some money coming to you in the form of a class action settlement. It may be cold comfort some, but hey, its money. To see if you qualify, click here. The deadline is today.

So long, Ameriquest. You will not be missed.

Ameriquest

So, what's the problem? According to the NCLC, locating bill pay centers in payday loan shops expose the most vulnerable consumers to heavy doses of payday lending "marketing" as well as high-pressure commission-based loan salespeople. And, despite the fact that utilities are closing down payment centers in favor of outsourcing and encouraging consumers to use electronic bill payment, the demand for in-person bill payment is growing by 5% per year.

So who are these mysterious consumers who like to pay their bills in person? According to the report they are also the sort of consumers who are most likely to take out a payday loan.

There is evidence that demand for in-person bill payment is strongest among low-income, minority and female customers. A 2004 study by Pacific Gas & Electric Co., a California utility with 5 million customers, described the company's in-person bill payers as "lower income types, and credit averse individuals who have no other means of payment than cash."

Or, as CheckFree tells prospective bill payment agents, collecting payments "offers the opportunity to turn a bill payer into a loyal customer."

Utility walk-in customers make especially good prospects for payday lenders, check cashers and other high-cost lenders. Expansion of the market for high cost financial services has been fueled by population growth and "declining to stagnant growth in household income of lower- and middle-income people," payday lender ACE Cash Express said recently. The company described its primary market as "the nation's approximately 60 million unbanked and underbanked individuals."

To a payday lender, a loyal customer is one who rolls their first payday loan over into a second, a third, even a forth and fifth loan, racking up fees and interest that can be double or triple the amount of the original loan. Far from being the exception to the rule, this sort of "loyalty" is the norm for payday lending customers. In fact, 9 out of 10 payday loans go to consumers who take out more than 5 such loans a year. The interest rate on a typical payday loan can be 400%.

From the report:

For retailers slow to make the connection, CheckFree has a pitch ready. "You have the stores. You want more customers. We have the solutions." CheckFree says it acts as an intermediary between 11,000 third-party bill payment collection sites and 150 billers, including 50 utility companies, who farm out collection services. "Walk-in Bill Payment Services offers retail locations an easy and inexpensive way to generate foot traffic, retain more customers and grow your business," the web site adds. "In fact, it costs you nothing and it even pays you a commission." CheckFree, a company 10 percent owned by software giant Microsoft Corp. handles PG&E's bill payment outsourcing.

CheckFree posted 2006 revenue of $879 million, recently had a market capitalization above $3 billion and includes on its board the former chairman of Visa International and former high-ranking executives of Bank of America and State Street Research. CheckFree also lists Progress Energy, Southern California Edison, AT&T, BellSouth and Verizon as customers for its outsourced bill payment services.

Although payday lending is skyrocketing in "popularity" (the total amount of payday loan outlets grew from 2,000 in 1995 to 24,000 in 2007) the report argues that it's not a reflection of consumer choice that bill pay centers are so often located in payday lenders. Only 7% surveyed said they prefer a payday lender as the location of a bill pay center. 4 out of 5 chose a grocery store as their preferred location.

So why are utilities sending their most vulnerable customers to locations where they will be subjected to a high-pressure commission-based predatory lending sales force? Simple. It saves them money. —MEGHANN MARCO

UTILITIES AND PAYDAY LENDERS: CONVENIENT PAYMENTS, KILLER LOANS (PDF) [National Consumer Law Center]
(Photo: NCLC)

• Amerquest showed the film Boiler Room as a training film to new hires. The film is about crooked stock brokers who sell bogus stocks to unsuspecting investors.

•Customers were told that their mortgages were fixed for "as long as they wanted" when in reality, they were only fixed for 2 years.

• Fixed rate mortgage papers were stacked on top of variable rate ones. After tricking the customer into signing all of them, the fixed rate papers were discarded.

•"Sending papers to the Art Department" was slang for covering the income numbers on w2s and writing in bigger ones, so as to qualify customers for mortgages they could not afford.

It's a great piece, everyone should head over to NPR and have a listen. —MEGHANN MARCO

Former Ameriquest Workers Tell of Deception [NPR]

The Poverty Business [BusinessWeek]
(Photo: Meghann Marco)

Because the entire economy is suffering as a result of the subprime lending crisis, not just those involved.

AFFIL's press release after the jump.

(March 23, 2007) Kirsten Keefe, Executive Director of Americans for Fairness in Lending (AFFIL), released the following statement in response to the crisis in subprime mortgage lending:

"Regulators can turn this crisis into an opportunity by reigning in rogue practices in the subprime mortgage lending industry. The inherent design flaws in the subprime mortgages can and must be changed. Foreclosures not only have a devastating impact on families, they impact communities, lower property rates, affect tax bases, and prohibit asset-building. Predatory practices need to end immediately and solutions must be designed to help the millions of distressed Americans who have mortgages they cannot afford and are forced to sacrifice basic necessities to pay profits to lenders.

"At the same time, we should not throw the baby out with the bath water: we need to find ways to support lending to low-income families; subprime loans don't have to be predatory. Meaningful regulations and real oversight can ensure that lenders provide loans that help Americans move into homeownership and move into prime rates over time. We oppose predatory and damaging subprime mortgages, but not legitimate subprime loans that encourage asset-building for Americans.

"Lenders must act responsibly and make loans that are affordable into the future. Servicers should deal fairly with borrowers. Vulnerable populations should not be targeted and sold abusive loans. Borrowers must be given full and clear disclosure of their loans terms and not be misguided by third-party brokers. Lenders should open their books and be accountable to not only their investors, but to their borrowers and to the regulatory agencies. Finally, regulators need to step up their oversight and demand that lenders lend responsibly."

The subprime mortgage crisis comes as no surprise to the national consumer and civil rights groups involved in Americans for Fairness in Lending. AFFIL partners have documented the impact of predatory mortgage lending on families and communities over the past decade and repeatedly warned that making loans to people who cannot afford them is an unsustainable business model. It is only now, after the dollar volume has become so great and investors are being impacted, that the issue has drawn real attention. As part of its national public awareness campaign launched this month, AFFIL is providing consumers with tools to fight back against such predatory lending practices at http://www.affil.org.
# # #

Kirsten Keefe is Executive Director of Americans for Fairness in Lending and a long-time consumer lawyer. She is a frequent trainer of counselors and lawyers on consumer law issues.

Americans for Fairness in Lending (AFFIL), is a non-profit organization working to end predatory lending practices, provide information to help consumers, educate policymakers about the need for reform, and demand action to assist debt-burdened Americans. AFFIL was created through a partnership of national consumer, civil rights, faith-based, non-partisan and grassroots organizations, including ACORN, Center for American Progress, Consumer Federation of America, Consumers Union, NAACP, National Consumer Law Center, National Council of La Raza, UAW, and U.S. PIRG, among others. AFFIL's goal is to establish fair lending principles and practices that will build and preserve individual and community assets. http://www.affil.org

Credit counselors are bracing for the continuing fallout from the expected 1-3 million foreclosures during 2007.

"Oh Lord, there is no way we can keep up with these calls," said Kaye Britton, a foreclosure counselor at the downtown nonprofit group that promotes home ownership to minority Americans, among others.

Really, the heart of the problem, as some have pointed out in the comments, is that banks should have known better. But the market was hot, they got carried away, and borrowers just followed the advice of their mortgage brokers. Things steamrolled, and here we are. The subprime lending fiasco is costing everyone money except the mortgage brokers who originally wrote the loans so they could walk away with a quick broker fee. What isn't quite clear is why the banks haven't sued the brokerage firms who knew exactly what they were doing when they engineered this mess by "helping" borrowers into loans they couldn't afford by misstating incomes and fudging numbers. — SAM GLOVER

(Photo: klannert)

The report, compiled by Bouton & Associates, a San Diego bank consulting firm, found 30,000 of 219,000 loans approved in 2004, or 14 percent, were considered predatory.

While 27 percent of the predatory loans were made to low- and moderate-income borrowers, a startling 73 percent of the borrowers came from either middle-income or upper- income census tracts, the report stated.

— SAM GLOVER

Middle Class Borrowers Fall Prey to Predatory Lending [Mortgage Lending Abuse Law Blog]

If you haven't seen Maxed Out yet, put it on your to-do list. And after you've watched it and are all fired up about the credit industry, here's something you can do about it. Student PIRGs has set up a website to collect stories about irresponsible credit card marketing practices on college campuses. Stop in and drop off your own experiences.

Student PIRGs also has six tips to help students avoid getting stuck in debt. They've been mentioned on Consumerist before, but they bear repeating:

1. Shop around before getting a card
2. Use your card sparingly
3. Pay off your balance every month
4. Make payments as early as possible to avoid late charges
5. Call your credit card company and ask for a lower rate
6. Seek help if you have trouble paying

— SAM GLOVER

Following on the heels of a media blitzkrieg on the credit industry, including payday lending, credit card companies, and the subprime mortgage industry, Democratic legislators in both houses of Congress are moving forward with legislation to curtail predatory lending practices. From the NY Times article:

The provisions include requiring mortgage lenders to determine if borrowers have the financial ability to repay loans and making issuers and buyers of predatory mortgages more legally accountable.

If this can make past an extremely well-funded lending industry not keen on further regulation, it could be a great help to consumers. The statute is both remedial and preventative. On the one hand, it would give consumers the right to sue mortgage lenders who write, well, stupid loans when they should know better. On the other, I'm sure the industry will say this means consumers will take advantage of them. Of course, lenders knew very well what they were doing when they started lending to risky borrowers and they made a heckuva lot of money doing it. — SAM GLOVER

(Photo: polarissilver)

Like the rest of the credit world, counseling services have good guys and bad guys. MSN offers several ways to identify a bad guy:

• They ask for a high upfront fee: $10 is appropriate. $1,000 is not.
  
• They lack accreditation: Make sure your counseling service belongs to the National Foundation for Credit Counseling or the Association of the Independent Consumer Credit Counseling Agencies.
  
• Crazy Promises: Counselors are not magicians. They can help manage debt, not make it disappear. They cannot pull a rabbit out of a pigeon in a hat. That quarter in their hand, the one that came from behind your ear. It's yours.

The Consumers' Guide to Credit Counseling [MSN Money via AllFinancialMatters]
National Foundation for Credit Counseling
Association of Independent Consumer Credit Counseling Agencies
(Photo: saibotregeel)

Another common problem that I encounter on a daily basis has to do with payday loans. While these may appear to be a quick and easy way to get money for rent, bills, credit cards, etc., the first loan is simply the start of a cycle where you are continually further and further behind on your payments and in need of even more money. Before you know what has happened, you are left in a downward spiral of overwhelming debt.

In most instances, my clients only need a few hundred dollars to pay their bills, so they head over to a cash advance store and put up their future paycheck in return for a no credit check loan. However, things start to get a little sticky when you discover that this place is charging an exorbitant interest rate, sometimes as much as 25% for a two week advance. To put this into perspective, if you borrow a rather modest $200, you could end paying upwards of $50 for this "quick and painless" loan. And once you have paid off your bills and repaid the loan, you may see that you are still a little short on cash due to the unexpected interest payment, so you need to take out another loan. Well, there goes another $50 dollars, meaning you just paid $100 in interest for a one month loan of $400.

Although throwing away $100 a month will not affect the livelihood of most individuals, the people who are taking out these cash advance loans are usually making minimum wage and working hard to make ends meet. It may appear that these operations are taking advantage of the low-income earners plight, but the government has said payday loan stores are not predatory and fulfill a crucial role for some people. I wholeheartedly disagree with this considering that I have seen first hand how it can destroy a family's life.

Avoiding Payday Loans [CreditPro]

Predatory lending is the practice of tricking consumers into agreeing to unfair and abusive loan terms in the hopes that the borrower will default. At this time their property is then seized and sold for a profit. Payday loans and other loans with unreasonably high interest rates can also be considered predatory lending. Watch the fascinating and sexy senators on their cam and see how legislation is born.—MEGHANN MARCO

Sexy Senate Webcam [US Senate]

Payday loans, which offer quick cash secured with the borrower's paycheck, can saddle borrowers with huge fees and interest, " sometimes as much as 800 percent." The numbers in the report are staggering—the average payday borrower pays back $793 for a $325 loan.

"Consumer advocates want states to limit the annual interest rates charged on payday loans to no more than 36 percent — similar to a cap on payday loans to military personnel that Congress passed this fall." The industry, naturally, is against such a rate cap. 11 states ban payday lending altogether. —MEGHANN MARCO

More controls urged on payday lenders [Seattle P-I]

"The holidays...time to give thanks, spread joy and shop for the best sales. Now, here's the perfect "gift" to help you stretch your holiday dollar. Volkswagen Credit is offering you the opportunity to 'skip' your December 2006 payment on your current account listed above. [...] Upon receipt of your extension agreement, we will assess your account a $25.00 extension fee, payable on your next due invoice. There is no need to send money at this time. [...] Happy Holidays!"

Volkswagen targets stupid people, tries to rip them off [I Will Teach You To Be Rich]
Full Scan of the Letter [Flickr]