Monday, October 31, 2016

Payday lenders as modern-day loan sharks and the fight by people of faith to #StopTheDebtTrap

Payday lenders as modern-day loan sharks and the fight by people of faith to #StopTheDebtTrap

By Stephen K. Reeves
Stephen K. Reeves is the advocacy coordinator for the Cooperative Baptist Fellowship.
Stephen K. Reeves is the advocacy coordinator for the Cooperative Baptist Fellowship.

Throughout most of our history, payday and auto-title lenders  were called loan sharks and were operating on the wrong side of the law. Such exploitation of the vulnerable was understood as immoral and considered far outside legitimate business practices.

Only since the 1990s have these predatory lenders found ways to evade or amend state usury laws and offer loans at rates of 400% APR and above. During this period, the industry has ballooned to become a multi-billion-dollar a year business with more than 16,000 storefronts nationwide.
But for as long as these institutions have been in operation, in states across the country, people of faith and community activists have been raising the alarm, calling for reform and seeking a return to traditional usury laws.

Perhaps no other issue today epitomizes both the worst and best of our current political system.
According to countless observers, studies and reports, this industry is not built upon expensive, emergency small-dollar, short-term loans given to risky borrowers. Instead, the heart of the payday business model is creating intentional debt-traps which profit most when their customers fail.
A large percentage of borrowers end up in a cycle of debt by paying fees and interest that only buys more time to pay a lump sum, never reducing what they owe. Others pay off the loan only to realize the resulting hole in their budget leaves it impossible to make it to the next payday without another loan.

In fact, according to a nationwide study of 15 million transactions by the Consumer Financial Protection Bureau, 75% of all fees generated from these loans come from the 45% of borrowers who end up in 11 or more loans in a 12 month period.

Lenders and the elected officials that defend these practices represent the worst of our current political climate. They often point out that borrowers sign a contract so lenders are due whatever fees and interest rate has been agreed to. By not considering the undue leverage a lender has over a desperate borrower, such a position declares the free market as the ultimate arbiter of morality.
This unrestrained capitalism — unencumbered by moral considerations — inevitably leads to a number of unacceptable results; child labor being a prime example. Similar thinking on Wall Street led to the Great Recession of 2008.

The payday lending industry takes advantage of fellow citizens by setting up a system where borrower failure leads to lender success and profit. Neighbors at the end of their rope are nothing more that potential profit.

Add on top of that the corrupting influence of industry money and it is a perfect demonstration of the worst in our political system. Generous political contributions — to politicians from both parties — and millions of dollars spent on lobbyists at the state and national levels often effectively overwhelm the voice of those calling for reform and borrowers who are already politically marginalized.

In another sense, the fight to reform this industry represents the best of our political potential.
Champions for change, particularly at the state level, have shown incredible and rare bipartisan cooperation. This has been the case in Alabama, Kentucky and Arizona, among others. In Texas, ultra-conservative Tom Craddick, the Republican former Speaker of the House from Midland, teamed up with liberal heroine, former Senator Wendy Davis to push for reform.

Ten years ago, in our nation’s capital, the bipartisan Military Lending Act (MLA) was signed into law by President George W. Bush. The MLA limited the interest rate for payday and auto-title loans to 36% APR to active duty members of the military and their families.

Reform efforts at the state and federal levels have resulted in broad coalitions spanning typical ideological and theological lines. These have included not only consumer rights, legal aid and civil rights groups, but social service providers and a broad swath of the faith community.

In 2015, a new coalition called Faith for Just Lending was launched to support national reform, with a large and diverse list of members including the Cooperative Baptist Fellowship, The Ethics and Religious Liberty Commission of the Southern Baptist Convention, U.S. Conference of Catholic Bishops, National Association of Evangelicals, PICO and the National Baptist Convention, USA, among others.

Banding together to oppose exploitation of the financially vulnerable certainly represents the best of what active and faithful public witness can look like.
When reform efforts have failed in state legislatures, advocates have turned to creative political solutions. In some places, including Texas, this has meant passing local ordinances at the city level. This fight, and the central role people of faith played in it, is on display in the excellent new documentary titled “The Ordinance.”

At the federal level the fight for fair and responsible lending practices led to the passage of Dodd-Frank and the creation of the Consumer Financial Protections Bureau (CFPB). This new, independent consumer watchdog — insulated from many of the corrupting elements of the campaign and lobby dollars — was given specific authority to reign in the abuses of payday and auto title lenders, and they’ve proposed a new rule to do just that.

The aim of the rule is to insure lenders are not setting borrowers up to fail and instead are making efforts to assess a borrower’s ability to repay without getting caught paying endless fees to extend the loan, or falling into an trap of repeated loans.

While the proposal goes a long way to improving the situation for borrowers in states with lax laws, for advocates working for decades for reform the rule is not strong enough.

During the recent public comment period that concluded October 7, it is estimated that the CFPB received more than one million comments. Thousands of comments from people of faith all over the country and across the political and theological spectrum were among those voices speaking out.

While the work and debate on predatory lending and the ultimate fate of the CFPB continues, a united front of passionate faith leaders engaging in advocacy on behalf of some of the most financially vulnerable neighbors exemplifies a positive development in the midst of troubled times. By broadening the list of “moral” concerns and taking on some of the worst elements of the system, people of faith represent some of the best. 

Stephen K. Reeves serves as the associate coordinator for partnerships and advocate for the Cooperative Baptist Fellowship. Learn more about CBF’s advocacy efforts at www.cbf.net/advocacy.
CBF is a Christian Network that helps people put their faith to practice through ministry eff­orts, global missions and a broad community of support. Learn more at www.cbf.net.

Tuesday, October 11, 2016

Prepaid Credit Cards Rule from Consumer Finance Protection Bureau

CFPB logo
October 5, 2016
CONTACT:Office of CommunicationsTel: (202) 435-7170
Prepared Remarks of Richard CordrayDirector of the Consumer Financial Protection Bureau
Prepaid Accounts Rule Press Call
Washington, D.C.
Thank you for joining us on this call. The Consumer Financial Protection Bureau today has finalized a new rule providing strong federal consumer protections for prepaid account users.
Prepaid accounts are among the fastest growing consumer financial products in the United States. One common form is the “general purpose reloadable” card, easily available at any number of stores or online. Consumers can load money onto these cards and use them for everyday purchases, just as they do with a bank account and a debit card. Prepaid accounts may also be loaded with funds by a third party, such as an employer.
The amount consumers put on general purpose reloadable cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012. And the total value loaded onto them is expected to nearly double to $112 billion by 2018. These accounts can be used to make payments, store funds, withdraw cash at ATMs, receive direct deposits, or send money to others. This market also includes a growing number of mobile or electronic prepaid accounts, such as PayPal or Google Wallet, which can also be used for a wide range of transactions.
Before today, however, many of these products lacked strong consumer protections under federal law. Our new rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone. Among the key new requirements that financial institutions must meet are these: (1) they must limit consumer losses when funds are stolen or cards are lost; (2) they must investigate and resolve errors that occur; and (3) they must give consumers free and easy access to their account information. The Bureau also has finalized new “Know Before You Owe” disclosures for prepaid accounts that give consumers the clear information they need, up front, about the fees they can be charged and other key details.
In addition to these requirements governing prepaid accounts, financial institutions must offer protections similar to those for credit cards if they allow a prepaid account to be used to access certain credit extended by the institution, its affiliates, or its business partners. These protections would apply when a prepaid card can be used to cover a transaction even though the account lacks sufficient funds, with certain exceptions.
The new rule applies to traditional prepaid cards, as well as mobile wallets, person-to-person payment products, and other electronic accounts that can store funds. The rule also covers: payroll cards; student financial aid disbursement cards; tax refund cards; and certain federal, state, and local government benefit cards, such as those used to distribute social security benefits and unemployment insurance.
Many of these important protections stem from the Electronic Fund Transfer Act, and they are intended to be similar to those for checking account consumers. For instance, error resolution rights will now be similar for both types of accounts. If consumers are hit with what they believe are unauthorized or fraudulent charges, their financial institution must investigate and resolve these incidents in a timely way. Where it turns out to be appropriate, they must restore the missing funds. Consumers will also now generally have limited liability for any withdrawals, purchases, or other transactions made on a lost or stolen prepaid card.
The new disclosures specified in the rule will give consumers easy-to-understand information about prepaid accounts right up front. Currently, some information is hard to find online or is not revealed until you open the packaging, which makes it hard to comparison shop. So the new rule sets an industry-wide standard on fee disclosures for prepaid accounts. This will simplify, organize, and present key information consistently so people can easily understand and act on it. This is much like the approach we have taken with “Know Before You Owe” disclosure forms for mortgages.
A separate part of the rule provides strong credit-related protections that stem from the Truth in Lending Act. These protections are for consumers who want the option to access credit in the course of conducting transactions with their prepaid cards so that they can spend more money than they have in the prepaid account. In situations where prepaid users are accessing credit within a transaction that is offered by the issuer, its affiliate, or its business partner, they must receive protections similar to those afforded to credit card users under federal law. These protections include underwriting requirements, detailed periodic statements, limitations on late fees and charges, and restrictions on the amount of fees that can be imposed in the first year that the credit is extended. To further separate prepaid accounts and any credit feature that is offered, companies must observe a 30-day waiting period before offering such credit to newly registered prepaid consumers.
The new prepaid rule will generally apply to prepaid accounts starting in October 2017. To make it easier to comparison shop among different products, prepaid account issuers must publicly post agreements for accounts they offer to the general public on their websites. They must also generally submit all their agreements to the Bureau, for posting on our website, starting in October 2018.
These important new protections fill gaps in the law for consumers. The rapidly growing ranks of prepaid users deserve a safe place to store their money and a practical way to carry out their financial transactions. And though many prepaid companies already offer some of these same protections to their customers, it is vital for all consumers to have the settled assurance that these protections are now the law of the land. Thank you.

The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.