Months before a federal agency proposed a
new rule threatening the profits of exploitative payday lenders across America, the
industrys leaders gathered at a
posh resort in the Bahamas to prepare for war.
At the March strategy session, Gil Rudolph of Greenberg Traurig, one of several law firms
working with the lenders, described the coming storm this way: Its like a
tennis match. Every time you hit a ball, hopefully it comes back. Our job is to
hit the ball back hard.
Most of us have a vague sense that corporate America doesnt
like being told what to do, but rarely do we get a front-row seat into how the playbook for resisting federal regulation is written. VICE has
obtained exclusive transcripts of this years annual
meeting of the Community Financial Services Association of America (CFSA), the payday lending industrys trade group, at the Atlantis Paradise Island Resort. Thats where lenders were taught exactly what it might take to beat back an existential threat to their business.
Payday loan customers typically borrow about $350 for a short-term deal, usually until their next paycheck.
As a condition of the loan, they generally give the lender access to their bank account to extract fees of between $10 and $30 for every $100 borrowed. If borrowers cant pay the loan when it comes due, they
can roll over into another loan, triggering more fees and getting trapped in
what critics call a cycle of debt. The average payday or auto-title loan (where the customer uses their car as collateral) carries an annual percentage
interest rate between 300 and 400 percent.
This June, the federal Consumer Financial Protection Bureau
that payday lenders can only issue loans to people they expect to actually be able to pay them back–while
also meeting their other financial obligations. The number of additional loans would
also be capped, and a 30-day cooling off period established to help prevent that vicious debt cycle, among other changes.
The industry decried
the rule when it went public, highlighting a government
simulation suggesting that 69 to 84 percent of storefront short-term payday loan volume would fall, potentially devastating their business. But the transcripts show lenders were already discussing how to prevent the rule from taking effect at the Atlantis back in March.
For starters, the industry plotted to bombard the Consumer Bureau with comments and
studies suggesting regular people would be the real losers–even if their own oversized
profits were obviously the focal point. The bureau has illustrated its knee-jerk
hostility to this industry, said Noel Francisco of corporate defense firm Jones
Day. So it is critical to point out the flaws… and include all of the evidence
showing the enormous benefits that payday loans have to offer the consumers who
Under the Small Business Regulatory Enforcement Fairness Act
(SBREFA), the feds must talk to small businesses affected by their rules, in
this case payday lenders, and respond to concerns. In addition, most proposed
federal regulations allow the public to make comments. At the Atlantis, leaders stressed the need to deliver hundreds of thousands of such comments before the
deadline on the payday rule, which is this
October 7. They suggested getting employees, landlords, suppliers, bankers,
neighbors, state and local politicians, and even pastors to write letters. (We
cant let them have all the ministers, said Tony Dias of Jones Day, referring
to faith groups who support the feds.)
But the biggest resources for this project, according to the
industrys leaders, are the customers who borrow against their future
In a breakout session called Take Action in the Rulemaking
Process Comment Period, Dias asked lenders to get every customer
that comes into your store… to write out a handwritten letter and tell the
bureau why they use the product, how they use the product, and why this will be
a detriment to their financial stability. A handout given to attendees featured
talking points for use in such letters, and Dias promised to send labels to every store
with the proper reference number so comments could be mailed in. We
will have a team of three full-time writers in our office, to assist them, he noted. Thousands
of these comments have already
It doesnt appear lenders were encouraged to explicitly demand their customers write a letter as a condition of getting their loan, but some may have danced up against the line. Theres precedent with that kind of thing, of course: In
Arizona earlier this year, lawmakers received boxes of letters from borrowers claiming to support a bill that would have
re-instituted high-interest payday loans eliminated in a 2008 ballot measure.
When the borrowers were contacted, many said they had no idea what they were signing, and some expressed opposition to the
Overwhelming the feds with comments serves three purposes,
as was driven home throughout the sessions in the Bahamas. First, it puts pressure on the
feds to change the rule in response to public outcry. Just as important, it
sets a basis for litigation after the fact–by submitting comments contradicting
the governments claims, the industry can argue that the Consumer Bureau violated the Administrative
Procedures Act by instituting a rule arbitrarily, and without basing it on
The third and perhaps most critical goal is to delay the
rule itself–that is, to keep the payday loan party going. If the agency has to wade through hundreds of thousands of comments–from homeowners to political officials and academics–to which they must respond, then they are necessarily bogged down, as Dennis Shaul, CEO of the industry trade group, put in the Bahamas. Delay does not
just force the feds to mull over the details, he added: If the rule is
delayed, operators are still continuing to be in existence and presumptively to
make a profit.
It seemed like a good plan–assuming you arent stuck in a cycle of
The industry complains about all this paperwork, these
900-page rules, Georgetown law professor Adam Levitin, who sits on the CFPBs
Consumer Advisory Board, told VICE. But by flooding with comments, they
contribute to it. Theyre trying to make government less efficient.
Inside the Atlantis, Shaul noted with pride the various ways
in which his group had already helped delay the rule: filing requests under the
Freedom of Information Act (FOIA) to divert agency resources, issuing petitions
and press releases and reports that require a rebuttal, and seeking meetings with
regulatory personnel to argue their side. All of that, plus the comment period, could
move the final rule beyond the 2016 elections, at which point Shaul expressed hope for wholesale
changes in regulatory personnel, perhaps leading to even longer delays. (A CFSA spokeswoman declined to comment for this story.)
Perhaps the conferences most interesting panel was called
Federal Rulemaking in 2016: What to Expect and What Alternative Products to Consider, run by Blake Sims
and Justin Hosie of the consumer finance law firm Hudson Cook. This was a
master class in how to exploit and manipulate regulatory loopholes.
For example, Hosie recommended that long-term installment
loans could earn similar rates of return as the classic payday product, if structured correctly. An eight-week loan with four installment payments is
effectively the same as a two-week payday loan rolled over three times, and if
you add fees on top of the interest rate, borrowers could still pay over 300 percent interest on a $500 loan–even if the new rule goes into
effect and gets enforced. Indeed,
lenders have wasted no time beginning to experiment with these products while the rule sits in limbo. Payday and auto title companies are
already making installment loans in 26 of the 39 states where they operate,
Nick Bourke, director of the small dollar loans research project at Pew Charitable
Trusts, a public policy research organization, told me. The rule makes it far
too easy to make a high-cost loan.
Even if lenders abide by the humane ability-to-repay standard,
theres wiggle room within it, Sims suggested at the resort. Customers could make
themselves eligible for a loan by agreeing to cancel their cable or cellphone
service, which would obviously reduce their overhead. (Of course, they could always
re-up those bills once the loan got approved.) Borrowers could also find
co-signers, whose income would be factored into the ability-to-repay test. And
if a borrower had no co-signers, the payday lender could rent one to them, using an affiliated company inside the store to
issue a guarantee of credit offered for a fee to the consumer, Hosie said.
Other ideas included having customers pay a membership fee
to access a payday storefront, recouping some of the lost profits from
lower-cost loans. Or lenders could put online kiosks in stores to help people buy
physical products. If we cant give you a loan for $300, but youre going to
use that for a new tire over here, we can finance the acquisition of that tire
for you, as Hosie put it. That might technically be considered a form of credit, rather than a
loan covered by the rule. The product could even be a prepaid card, Hosie noted, meaning that the consumer would essentially
buy money on credit, to get around the payday loan restrictions.
The abundance of creative ways the payday industry tries to avoid regulation is no surprise given how active its been at the state level, as a recent
report from Democrats in Congress shows. If you halt payday loans, they
gravitate to title loans. If you halt title loans, they gravitate to Internet
loans, Democratic US senator Jeff Merkley, who has introduced legislation
to prevent loans that dont comply with state laws, told me. Its a hell of
The feds have launched
a probe into high-cost products not covered by the pending rule, including
long-term installment loans. And they have anti-evasion measures baked into the new regulation, giving the Consumer Bureau extensive powers to catch trickery.
But that all depends on proper enforcement. And even if the rule works, its likely to catch companies after they have prospered
by running a train on peoples financial lives for months
Thats their business model, said Gynnie Robnett, who directs the payday lending campaign at Americans for Financial Reform, a coalition of consumer groups. And they seem determined to
preserve it, any weasel-y way they can.
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They Brexit, we bought it. Well, we bought a new mortgage, at least.
Lenders say they have seen an increase in refinance applications since the United Kingdom voted to exit the European Union. The vote happened Thursday, and on Friday morning, mortgage rates tumbled about one-eighth of a percentage point. Then the underlying bond yields crept down a little Monday, then again Tuesday, then again Wednesday.
Analysts are weighing in on how Discover Financial Services (NYSE:DFS), might perform in the near term. Wall Street analysts have a much favorable assessment of the stock, with a mean rating of 1.8. The stock is rated as buy by 13 analysts, with 10 outperform and 6 hold rating. The rating score is on a scale of 1 to 5 where 1 stands for strong buy and 5 stands for strong sell.
For the current quarter, the 25.00 analysts offering adjusted EPS forecast have a consensus estimate of $1.42 a share, which would compare with $1.33 in the same quarter last year. They have a high estimate of $1.50 and a low estimate of $1.30. Revenue for the period is expected to total nearly $2.22B from $2.18B the year-ago period.
For the full year, 27.00 Wall Street analysts forecast this company would deliver earnings of 5.70 per share, with a high estimate of $6.04 and a low estimate of $5.54. It had reported earnings per share of $5.13 in the corresponding quarter of the previous year. Revenue for the period is expected to total nearly $9.00B versus 8.74B in the preceding year.
The analysts project the company to maintain annual growth of around 7.76% percent over the next five years as compared to an average growth rate of 10.89% percent expected for its competitors in the same industry.
Among the 23 analysts Data provided by Thomson/First Call tracks, the 12-month average price target for DFS is $63.17 but some analysts are projecting the price to go as high as $75.00. If the optimistic analysts are correct, that represents a 41 percent upside potential from the recent closing price of $53.27. Some sell-side analysts, particularly the bearish ones, have called for $56.00 price targets on shares of Discover Financial Services (NYSE:DFS).
In the last reported results, the company reported earnings of $1.33 per share, while analysts were calling for share earnings of $1.32. It was an earnings surprise of 0.80%percent. In the matter of earnings surprises, the term Cockroach Effect is often implied. Cockroach Effect is a market theory that suggests that when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed. In the case of earnings surprises, if a company is suggesting a negative earnings surprise it means there are more to come.
Discover Financial Services operates as a direct banking and payment services company in the United States. It operates in two segments, Direct Banking and Payment Services. The Direct Banking segment offers Discover-branded credit cards to individuals; and other consumer products and services, including private student loans, personal loans, home equity loans, and other consumer lending, as well as deposit products, such as certificates of deposit, money market accounts, savings accounts, checking accounts, and individual retirement arrangement certificates of deposit. The Payment Services segment operates the Discover Network, which processes transactions for Discover-branded credit cards, and provides payment transaction processing and settlement services; and PULSE network, an electronic funds transfer network that provides financial institutions issuing debit cards on the PULSE network with access to automated teller machines and point-of-sale terminals. This segment also operates the Diners Club International, a payments network that issues Diners Club branded charge cards and provides card acceptance services. The company was incorporated in 1960 and is based in Riverwoods, Illinois.
“We must halt the unscrupulous lenders from targeting the poor and most vulnerable among us,” Olson said in a statement. “In tandem, good local payday lending regulations and the proposed federal rules will greatly assist those in desperate financial straits from becoming hostages of unscrupulous payday lenders.”
Payday loans are typically small-dollar loans, due for repayment in two to four weeks, made to borrowers who don’t have access to credit cards or traditional lenders. They carry fees that translate to annual interest rates upwards of 300 percent, and can be renewed, which consumer advocates say leads to a cycle of debt.
In May of 2014, then-City Manager Tom Higgins briefed the Fort Worth council on what other Texas cities were doing. But his report suggested that the timing for regulations in Fort Worth was not good and that the council should await the outcome of lawsuits filed against ordinances in other cities.
Since then, the issue has fallen through the cracks. Shortly after issuing his report, Higgins retired. The new city manager, David Cooke, took over on June 30, 2014.
Cooke said Wednesday he has not received a letter from the diocese regarding its request, but added he’d need to do some research regarding what is covered by state and federal law before considering if a local ordinance is needed.
Mayor Pro Tem Sal Espino said he wanted the city staff to look into an ordinance two years ago, but the consensus was to wait and see what the federal government was going to do. Now Espino said he may again consider asking for a staff report on the issue.
Earlier this month, the Consumer Financial Protection Bureau issued proposed rules that would require lenders to make sure borrowers have the ability to repay their loans and stop repeated attempts to debit bank accounts for loan payments. The public can comment on the proposed regulations until Sept. 14.
The Texas Catholic Conference has made payday lending a priority issue since 2009.
In November of 2015, St. Joseph Catholic Church in Arlington, a parish in the Fort Worth Diocese, and the Texas Catholic Conference worked to help Arlington strengthen rules for payday, auto title and other short-term loans.
In Arlington, for example, loans are limited to 20 percent of a borrower’s gross monthly income and auto-title loans are limited to 70 percent of the vehicle’s value, or 3 percent of the borrower’s gross annual income.
Fort Worth is home of Cash America International, the large pawn shop chain that also engaged in payday lending. In April, Cash America agreed to merge with Arlington-based First Cash Financial Services. Both have been backing out of the payday lending business as federal, state and local regulators sought restrictions.
Instead, the new company combined company, to be based in Fort Worth, will focus on their pawnshop operations.
It really is free money, and its the first step to building wealth, says Xavier Epps, a financial advisor with XNE Financial Advising, LLC, in Alexandria, Va. Matching programs can help you grow your retirement portfolio, without any additional investment risk.
My message to the Task Force is simple: Broadening access to stable and affordable housing must be a central element of any effective anti-poverty strategy.
Policies to promote a more vibrant economy, greater wage growth, better schools, and stronger families are all critical to enhancing the life prospects of millions of Americans. But, for too long, we have underestimated the role that housing plays as a foundation for upward mobility.
Housing, of course, is shelter, a necessity of life. But it is also the bridge that links us to our neighbors, communities, and the world beyond.
Research shows that stable, affordable housing is critical to academic achievement. That’s no surprise. After all, how can a child be academically successful if she must repeatedly move – changing schools, losing mentors and friends, and missing out on key parts of the curriculum – simply because her family cant afford the rent? What kid is ready to focus and learn in class when the night before his bed was in an abandoned van or a shelter?
Ask yourself: Could you have succeeded under these circumstances?
The location of housing is also critical. A home located in a good neighborhood close to jobs and other opportunities can serve as a gateway to economic success. Those families who cannot afford to live in these communities are often relegated to unsafe neighborhoods with few employment prospects.
Many residents of these low-opportunity communities are forced to spend excessive amounts of time and money on long commutes to their jobs.
In desperation, some among us forego housing altogether. Yet how can we expect a person to win and hold a job if his bed is a park bench?
Unfortunately, for some families, these struggles with housing stability and affordability span generations, a fact vividly demonstrated by Harvard sociologist Matthew Desmond in his new book, Evicted: Poverty and Profit in the American City.
Today, a record number of households, 11.8 million, spend in excess of 50 percent of their income just on rent. That means fewer dollars for other essentials like medical care, nutritious food, and education.
A severe shortage of affordable rental homes is a key driver of these high rental-cost burdens. It’s estimated there are just 31 affordable and available rental homes for every 100 “extremely low-income” households. Federal rental assistance programs provide much-needed help, but fewer than one in four eligible households receives aid. Most assistance is distributed through long waiting lists and by lottery.
With rents rising across the country, fewer Americans are able to save for a mortgage down payment. The national homeownership rate has dropped nearly six percentage points from its high in 2004. The homeownership rates for minority households and young adults have plummeted. Millions of creditworthy families are now excluded from the wealth-building opportunities that homeownership can provide.
In the coming decade, these twin problems – rising rent burdens and diminished access to homeownership – are likely to worsen because of powerful demographic trends, most notably the increasing diversity of the US population.
For me, the conclusion is inescapable: If you want to fight poverty and promote upward mobility, start by repairing our nation’s failing housing system. When they release their anti-poverty plan, House Republicans have a great opportunity to make this critical connection. However, if the plan ignores the central role of stable, affordable housing in helping people lead productive lives, it will be fatally flawed.
Lazio is a member of the executive committee of the J. Ronald Terwilliger Foundation for Housing Americas Families and a partner at the Jones Walker law firm. He served four terms in the US House of Representatives.
Other highlights from CoreLogics first-quarter report:
- Nevada had the highest percentage of homes in negative equity at 17.5 percent, followed by Florida (15 percent), Illinois (14.4 percent), Rhode Island (13.3 percent) and Maryland (12.9 percent). Combined, these top five states account for 30.2 percent of negative equity in the US, but only 16.5 percent of outstanding mortgages.
- Texas had the highest percentage of homes with positive equity at 98.1 percent, followed by Alaska (97.8 percent), Hawaii (97.8 percent), Colorado (97.5 percent) and Washington (97.2 percent).
- Of the 10 largest metropolitan areas by population, Las Vegas-Henderson-Paradise, Nev., had the highest percentage of homes in negative equity at 19.9 percent, followed by Miami-Miami Beach-Kendall (19.6 percent); Chicago-Naperville-Arlington Heights, Ill. (16.7 percent); Washington-Arlington-Alexandria, DC-Va.-Md.-W.Va. (10.9 percent); and New York-Jersey City-White Plains, NY-NJ (6 percent).
- Of the same 10 largest metropolitan areas, San Francisco-Redwood City-South San Francisco had the highest percentage of homes in a positive equity position at 99.4 percent, followed by Houston-The Woodlands-Sugar Land, Texas (98.3 percent); Denver-Aurora-Lakewood, Colo. (98.3 percent); Los Angeles-Long Beach-Glendale, Calif. (96.1 percent); and Boston (94.3 percent).
- Of the total $299.5 billion in negative equity nationally, first liens without home equity loans accounted for $166 billion, or 55 percent, in aggregate negative equity, while first liens with home equity loans accounted for $134 billion, or 54 percent.
- Among underwater borrowers, approximately 2.4 million hold first liens without home equity loans. The average mortgage balance for this group of borrowers is $244,000 and the average underwater amount is $68,000.
- Approximately 1.6 million of all underwater borrowers hold both first and second liens. The average mortgage balance for this group of borrowers is $307,000 and the average underwater amount is $84,000.
- The bulk of positive equity for mortgaged residential properties is concentrated at the high end of the housing market. For example, 95 percent of homes valued at $200,000 or more have equity compared with 87 percent of homes valued at less than $200,000.
That fact, added to the fact that were experiencing a bit of an inventory shortage, could make this a tougher than normal spring buying season for purchase money lenders. Zillow reports that there are 5.9% fewer homes for sale in the US than a year ago.
Even though the Federal Reserve has backed away from committing on additional interest rate increases this year, no one believes that mortgage interest rates will stay low forever or will return to their historically low rates, giving few homeowners reason to refinance. In fact, most people in the industry expect rates to rise eventually, further stifling the refinance business.
One part of the business that could benefit from these two trends is home equity lending.
With the value of a homeowners property increasing and no incentive to refinance, the only way to cash out is through a home equity loan. In fact, according to USA Today, consumers already realize this.
In a recent story, USA Today cited Equifaxs announcement that lenders originated home equity lines of credit with limits of $146.1 billion in 2015, up about 20% from 2014 and the third straight year of growth at that level or higher.
When the story came out in March, average home prices were up 35% from 2012 and were just 4.9% off of the 2006 peak, according to Samp;P/Case-Shiller, also quoted in the article. But executives at Equifax pointed out that underwriting was still strict.
Annamaria Andriotis, writing in the Wall Street Journal in the same time period, wasnt so sure. She pointed out that some lenders are already allowing borrowers with high credit scores to withdraw up to 95% of the homes equity and making home equity loans to borrowers with credit scores as low as 660.
Andriotis pointed out that competition for home equity borrowers is heating up, quoting LendingTree as saying that 37% of homeowners who have less than 20% equity in their homes and who applied for HELOCs through its website in February were contacted by lenders interested in possibly giving them a new line. Just 9% of those homeowners were contacted a year prior.
It appears that this spring-buying season, many lenders will be left either trying to entice Millennials into the first-time homebuyer market or chasing home equity loans. Either path will have its challenges, but the latter will be significantly easier with the right information. We have found that there are really two key pieces of information that a lender must have to effectively target and prospect home equity borrowers.
Those lenders who develop good systems for gathering these two sets of information will be more likely to find homeowners who are in the home equity buy zone ahead of their competitors.
The first piece of information is the customers credit profile. The second is the public record information relating to the real estate. When the information gathered in these two areas lines up, it suggests that there may be an opportunity.
The credit report is straightforward. While there has been talk for years about moving away from Fair Isaacs FICO score toward a more inclusive measure of a consumers credit capacity and character, nothing has come close to replacing the industry standard.
Each lender will have its own underwriting standards and since many home equity loans are held in portfolio, each lender will determine their own risk appetite.
Still, the credit report is an excellent go/no go gate with which to begin the process.
If the borrower is creditworthy, the next step is to gather information about the subject property. Many changes can occur that impact the property after the loan is boarded into the servicing system. Even if the institution services its own loans, it cannot be sure that the situation is the same as it was when the original loan was underwritten.
At a minimum, the lender must know
- The current owner of the property or vesting information
- Property conveyance from the prior owner to the current owner
- About any open mortgages
- About any Judgments amp; Liens
- Tax information and status
- The complete legal description
Comprehensive property reports exist that can provide all of this information in a very short timeframe. Thats important because for home equity lenders, time is of the essence.
When consumers need to access their home equity, they are likely to have a pressing need. This will reduce the size of the window of opportunity and drive borrowers to the first lender that agrees to work with them on the loan.
Borrowers often assume that the underwriting process for a home equity loan or line will be shorter than that of a purchase money loan. Often, that is not the case. Many large lenders alert borrowers on their websites that the underwriting process for these loans can take 45 days to complete, from the time the application is submitted.
That makes it vitally important that lenders who hope to compete for home equity loans identify prospects ahead of their competition in order to be the first to approach the borrower.
In order to move quickly, lenders should seek out a vendor partner that can provide both credit information and property information, allowing them access to all of the information they need to advance an offer as quickly as possible. Choosing the right information provider will also reduce risk during the underwriting process as the information acquired will be accurate.
This bundled services approach to home equity loan prospecting works quite well for community banks and credit unions that already have a portfolio of loans that they are servicing that quite often have HELOC opportunities hiding within them. There are not very many bundled services offerings in the market that can meet this need, but quality options do exist.
Although you wont get a 0% interest rate, taking out a personal loan or a home equity loan or line of credit may be a safer way to get cash. Personal loans have lower interest rates than credit cards, depending on your credit score. Home equity loans also have lower interest rates, and the interest you pay on the loan is tax-deductible, just like mortgage interest.
He expects other businesses will open up, too. Hilliard Lyons, a financial advising company located across the alley from the store, had a ribbon cutting ceremony recently. People from out of town are investing into the downtown area, Badger said.