CONSUMER CORNER: Cash Advances & Payday Loans ~ By Alan Marx

UNDERSTANDING CASH ADVANCES & PAYDAY LOANS

If you live anywhere in Tennessee, you are likely to walk or drive past stores that offer short-term loans.  These loans are known by many different names, including cash advances, check advances, post-dated check loans, and deferred deposit loans, but they all offer small, short-term, high-rate loans at a very high price.  As described by the Federal Trade Commission (FTC), typically the borrower gives the lender a personal check for the loan amount, plus a fee that depends upon and increases with the amount of money borrowed.  The borrower gets the money less the fee, while the lender agrees to hold the check until the borrower’s next payday, or social security payment date, or another agreed upon date.  If the borrower has a bank account, the borrower may be asked to authorize the lender to make an electronic deposit of the loan amount, minus the fee.  The amount due is then withdrawn by the lender on the due date.  If the loan is extended one or more times, a new fee is charged each time.

Under federal law the lender must disclose the cost of the loan in writing, including the dollar amount and the annual percentage rate (the cost of credit on a yearly basis), before the borrower signs for the loan. The annual percentage rate is based on the amount borrowed, the length of the loan, the fees, and any other credit costs.

Payday loans are expensive, even if the loan is outstanding only for two weeks, but when the loan is rolled over again and again, the costs becomes astronomical.   For example, if the borrower does not pay back the loan on the due date, typically 14 days, and if the lender agrees to extend the loan for another two weeks, a second fee would be due.  The FTC provides an example in which the loan is for $100 with an initial fee of $15, which it calculates to be at an annual percentage rate of about 391 percent if the loan is rolled over every 14 days.  If the loan is rolled over only three times, the finance fee alone would amount to $60 to borrow the $100.

The CFPB studied these loans and, in a report issued on March 25, 2014, the CFPB staff findings include the following:

1.     Four out of five payday loans are rolled over or renewed within the initial loan period and the majority of borrowers renew their loans so many times that the amount of fees paid exceeds the initial amount of money borrowed.  More than 80 percent of payday loans are rolled over or renewed within two weeks.

2.     Three out of five payday loans are made to borrowers whose fee expenses exceed the amount borrowed: Over 60 percent of loans are made to borrowers in the course of loan sequences lasting seven or more loans in a row. Roughly half of all loans are made to borrowers in the course of loan sequences lasting ten or more loans in a row.

3.     Four out of five payday borrowers either default or renew a payday loan over the course of a year.  Only 15 percent of borrowers repay all of their payday debts when due without re-borrowing within 14 days; 20 percent default on a loan at some point; and 64 percent renew at least one loan one or more times.

4.     Four out of five payday borrowers who renew end up borrowing the same amount or more.  Specifically, more than 80 percent of borrowers who rolled over loans owed as much or more on the last loan in a loan sequence than the amount they borrowed initially.

5.     One out of five payday borrowers on monthly benefits end up trapped in debt: The study also looked at payday borrowers who are paid on a monthly basis and found one out of five remained in debt the entire year of the CFPB study. Payday borrowers who fall into this category include elderly Americans or disability recipients receiving Supplemental Security Income and Social Security Disability.

The report can be found at:

http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf

The CFTB has been drafting proposed regulations to address payday lending and in particular the issue of repeat borrowing, which critics have referred to as “revolving doors of debt” and “debt traps.”

On March 25, 2014, the CFPB held a public hearing in Nashville, with representatives testifying on behalf of borrowers and lenders.  Lenders at the hearing and in other places have argued that payday loans serve a legitimate and necessary purpose.  Millions of Americans live paycheck to paycheck, with few, if any, savings or other liquid assets. Even if employed, they can be devastated by an unexpected home or car repair or an emergency doctor’s bill.

The supporters of payday loans have cited a study by the Federal Deposit Insurance Corporation, which found that 28.3% of all U.S. households are deemed unbanked or under-banked.  Because so many people do not have bank accounts or access to bank loans, the proponents of payday loans estimate that 4.7% to 5.5% of U.S. households have used payday lending at least one time.  They argue that payday loans are quick to arrange, readily available, and important for these borrowers when they have an immediate need for help.

The Community Financial Services Association of America (CFSA), an association whose members include many legal, licensed payday lenders, acknowledges that some payday lenders have used predatory activities, but it argues that this is not a system-wide practice of the entire payday loan industry.  Instead, CFSA says it is a characteristic of outliers, bad apples, shady, illegal and fraudulent operators, and scammers.   After reviewing the total number of complaints received by CFPB, the CFSA says that the complaints about payday loans are a small percentage of and much smaller than complaints about mortgages, debt collection, and credit cards.

The debate about the risks and benefits of payday loans will be in the news in the next few months, and it is likely that any regulations issued by the CFTB will be met with lawsuits filed by lenders.  The issue of whether the payday loan industry should continue as it is or be much more strictly regulated will not be solved here, but that topic will be followed in future columns. However, practices used by some payday lenders have been challenged in litigation filed by the FTC, the Consumer Financial Protection Board (CFTB), and the Attorneys General of several states.  The remainder of this column will focus on those cases and other regulatory actions.

CFTB

ACE Cash Express, one of the country’s largest payday lenders,  has operated in 36 states and the District of Columbia.   In July 2014 the CFPB reached a settlement with ACE Cash Express.  CFPB Director Richard Cordray said the lender had “used … threats, intimidation, and harassing calls to bully payday borrowers into a cycle of debt.”  The CFPB said delinquent consumers were threatened with extra fees, reports to credit reporting agencies, and criminal prosecutions.   The CFPB asserted that debt collectors made repeated calls to some consumers, to their offices, and even to their relatives about debt that originated in this lender’s payday loans.

To settle the case ACE Cash Express agreed to pay $10 million, of which $5 million will be paid to consumers and $5 million will be paid to the CFPB as a penalty.  ACE Cash Express was ordered to end its illegal debt collection threats, harassment, and pressure for borrowers to take out repeated loans.

In another action, on September 8, 2014, the CFPB sued Richard F. Mosley, Sr., Richard F. Mosley, Jr., and Christopher J. Randazzo, controllers of the Hydra Group, an online payday lender.  The case, filed in federal court in Missouri, alleged that the Hydra Group was running an illegal cash-grab scam.  The entities were based in Kansas City, Missouri, but many of them were incorporated offshore in New Zealand or the Commonwealth of St. Kitts and Nevis.  The complaint can be found at

http://files.consumerfinance.gov/f/201409_cfpb_complaint_hydra-group.pdf

[It should be noted here and in the cases cited below that until courts issue a final ruling or a settlement is reached, a complaint is only an assertion by one party, not a finding that a defendant has violated the law.]

According to the CFPB, the Hydra Group, working through a maze of approximately 20 corporations, used information bought from online lead generators to gain access to consumers’ checking accounts.  It then deposited payday loans and withdrew fees from those accounts without consent from the customers.   Fees were withdrawn every two weeks as a finance charge.  When customers objected to the banks, Hydra and its associates reportedly submitted false loan documents to the banks in support of its claims that the consumers had agreed to the online payday loans.  The CFPB alleged that over a 15-month period, the Hydra Group made $97.3 million in payday loans and collected $115.4 million from consumers.

The Hydra Group was charged with making unauthorized and unlawful withdrawals from accounts in violation of the Consumer Financial Protection Act, the Truth in Lending Act, and the Electronic Fund Transfer Act.  The CFPB alleged that consumers typically got the loans without having seen the finance charge, annual percentage rates, total number of payments, or the payment schedule. Although some consumers did receive loan terms up front, the CFPB claimed that what was provided contained misleading or inaccurate statements. For instance, the Hydra Group allegedly told consumers that it would charge a one-time fee for the loan, but it collected that fee every two weeks indefinitely.  In addition, the CFPB alleged that Hydra did not apply any of those payments toward reducing the loan principal.  If consumers tried to close their bank accounts to end the charges, the accounts were turned over to debt collectors.

The Missouri federal court granted an ex parte application for a temporary restraining order halting the defendants’ operations and freezing their assets.

FTC

Also on September 8, 2014, the FTC filed a case in the same federal court in Missouri against a web of twelve limited liability companies (the CWB Services group) owned by Timothy Coppinger and Frampton (Ted) Rowland III.  The FTC brought its action under Section 5 of the FTC Act, the Truth in Lending Act, and the Electronic Funds Transfer Act.  The challenged conduct was similar to the conduct in the CFPB case.  The FTC said the CWB Services group made an estimated $28 million in loans and collected $47 million from consumers' accounts during an 11-month period.

The federal court issued a restraining order that stopped the CWB defendants’ operations and froze their assets.  It also appointed a receiver.

State Litigation

Payday loans are unlawful in severalstates.  For example, under New York law loans of $250,000 or less with an interest rate of at least 16 percent are treated as illegal and usurious, while those with interest rates in excess of 25 percent are deemed criminally usurious.

In 2013 and 2014 Eric Schneiderman, the Attorney General of New York, filed cases against lenders who tried to collect on payday loans in New York.  He sued online lender Western Sky Financial LLC and its related companies, WS Financing LLC and CashCall Inc., companies with ties to a Native American tribe.  The case claimed that since 2010 Western Sky and its affiliates made at least 17,970 loans to New York residents, that the annual interest rates charged were more than 355 per cent, and that the interest and fees amounted to nearly $185 million.

Sixteen tribes affiliated with the lenders claimed immunity on the grounds that they operate as sovereign governments.  For the same reason they said they would refuse to comply with cease-and-desist orders issues by the top banking regulator of New York, a position they also took regarding proceedings undertaken by the CFPB.  In response to these and similar challenges by the tribes, state and federal regulators warned banks not to process transactions for online lenders.

Courts have held that under certain circumstances tribal-owned businesses can enjoy sovereign immunity, but the same immunity may not apply when a business is owned by an individual member of a tribe. The New York lawsuit claimed that Western Sky is a limited liability company owned by Martin Webb, not owned or operated by the Cheyenne River Sioux Tribe.  Western Sky made the loans and then sold them to WS Funding, a subsidiary of CashCall, a company owned by J. Paul Reddam.  The State’s view was that’s the loans were made by Western Sky in “name only,” while the risk was borne by the subsidiaries.  Both Webb and Reddam were named as defendants in the lawsuit.

According to The New York Times, the New York case against Western Sky is similar to cases and regulatory actions filed against other online payday lenders by state officials in Colorado, Georgia, Missouri, New Hampshire, North Carolina, Oregon, Minnesota, Pennsylvania, and Virginia, in which some of the lenders also had ties to Native American tribes.  After Colorado sued Western Sky in 2011, a district court judge ruled that tribal ties did not shield Western Sky from state law. The judge noted that borrowers obtained the loans while living in Colorado, not on the reservation.

In August 2013, Western Sky announced it would discontinue offering loans after facing lawsuits from around the country over its high interest rates.

During the same period two tribes, the Otoe Missouria tribe of Oklahoma and the Lac Vieux Desert Band of Michigan’s Lake Superior Chippewa filed a federal lawsuit against New York, claiming that state’s enforcement actions against payday lenders violated their rights as sovereign tribes.  According to the Wall Street Journal, a federal appeals court denied a request for a temporary injunction that would have barred New York from prohibiting tribal lending during the litigation.  The tribes then dropped their case.

In another case the New York Attorney General sued and then settled with Foster & Garbus, a law firm engaged in debt collections against borrowers arising out of payday loans made by NEP, LLC.  Foster & Garbus denied knowing that the debts came from payday loans, but it stopped trying to collect after the Attorney General challenged the practice.  The Attorney General said ignorance is not a defense.

As part of the settlement Foster & Garbus was prohibited from filing any collection action on a loan until it examined the underlying documents and verified in writing that the loan is not a payday loan.  In addition, it was required to investigate any written complaint that a prior judgment or settlement it obtained did not involve a payday loan, and if it turned out that it was from a payday loan, it had to vacate the judgment and pay restitution to the consumer.

In a third matter the New York Attorney General reached a settlement with five payday lending companies that were charged with repeatedly violating the New York law against payday loans.  The companies were V&R Recovery D/B/A Alexander & Stefano; RJA Capital Inc.; Westwood Asset Management LLC; Erie Mitigation Group LLC and Northern Resolution Group LLC.  They agreed to pay $279,606 in restitution, to pay $29,606 in penalties, and to indefinitely discontinue payday lending in New York.   One of the companies also agreed to a bar on collections of $3.2 million in outstanding payday loans in New York.

The New York Times reported that as more states have imposed interest rate caps, payday lenders have shifted their bases of operations to more hospitable places, including Belize, Malta and the West Indies.  The lenders view the shift as a protection against lawsuits and tax claims.

Conclusion

Payday loans are among the most expensive, if not the most expensive, ways to borrow money.  These loans not only cost a lot, but they also carry a very high risk of entrapment into a cycle of debt that many people are unable to escape.  The statistics about the number of borrowers who fall behind and spend more money on fees than they received in their original loan are eye-opening.  Interest rates on credit card debt are steep, but by comparison the cost of credit card debt is only a fraction of the cost of a payday loan.  A future column will address debt counseling and other options.

Try to find a better way to handle your debt, so that when you pass the stores that offer short-term loans, you can keep going.

If you need professional help managing debt, please visit the National Foundation for Credit Counseling at www.NFCC.org or the Association of Independent Consumer Credit Counseling Agencies at www.AICCCA.org for a referral to a nonprofit agency near you.