Unrepentant, Intransigent Lenders: Overplaying Their Hand?

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Still out of town, still behind the eight ball, so forgive the terseness with today’s offerings.

Two items provide further evidence that lenders not only have little sense of responsibility for the problem they helped create, but worse, their unwillingness to reform in the face of considerable public pressure. As we noted, with regulators capitulating in serious ways to their demands, so far this take no prisoners strategy looks like a winner. But the housing crisis is only in its early stages, and as it intensifies, the high-handedness and lack of remorse is sure to backfire,

Although payday lending is typically to a cohort even less creditworthy than subprime borrowers, it too is coming under harsh scrutiny as the public is becoming less tolerant of predatory lending (and yes, I have trouble with the argument that this is a valuable service, since the payday lender’s objective is to find/create clients who become dependent and keep rolling their loans over).

So it confirms the industry’s lousy image when a payday lender threatened to yank its donations to foodbanks unless they withdrew from the Center for Responsible Lending, which among other things, is seeking to put curbs on payday lenders. So its contributions had nothing to do with helping the poor, as the like to claim, but was, as one would expect, about buying allies

From the Wall Street Journal:

Rent-A-Center Inc., a rising power in the payday-loan industry, pressured an Ohio food-bank association into quitting a coalition of activists that advocates a crackdown on the business.

In a series of telephone calls in recent weeks, Rent-A-Center executives warned America’s Second Harvest and its Ohio affiliates that Rent-A-Center would yank charitable contributions from hunger programs in the state unless the local food banks withdrew from the Ohio Coalition for Responsible Lending. The coalition has been pressing the state legislature to cap high interest rates charged on payday loans.

Wednesday, the Ohio House passed a bill that would cap the annualized interest rate on payday loans at 28% and limit borrowers to four loans of $500 each a year. Ohio’s governor said last week that he supports a cap.

Rent-A-Center currently charges interest rates on one-week payday loans that are equivalent to an annual rate of as much as 782%, according to a company Web site. In Ohio, the average borrower pays $15 for each $100 borrowed, and the typical loan is repaid in 19 days, a 288.16% annual rate, the company says.

“We must have our name taken off the Web page of the Ohio Coalition for Responsible Lending,” Anne Goodman, chairman of the Ohio Association of Second Harvest Foodbanks, wrote in an email to a subordinate April 18. America’s Second Harvest, the Ohio association’s parent, “got another call today from Rent-A-Center, as they thought it would be gone by now.”….

Bill Faith, legislative chairman of the Ohio Coalition for Responsible Lending, said it is “out of bounds” for a corporate donor to try to use its financial clout to change the public-policy position of a nonprofit organization. “They’re just trying to buy people off,” Mr. Faith said.

Charles W. Hall, a tax lawyer at Fulbright & Jaworski in Houston, said Rent-A-Center’s action falls into a “gray area.” In general, a company can’t deduct a charitable gift if it receives something of value in return, but it is unclear whether pressuring a charity would invalidate the deductibility of a gift, Mr. Hall said.

Rent-A-Center executives said the rate cap proposed in Ohio would force the company to shut down its Cash AdvantEdge operations in the state, home to 53 of the company’s 276 financial-services locations nationwide. Such a bill “will end the payday-lending industry in Ohio, like a similar rate cap did in Oregon last year,” Dwight Dumler, Rent-A-Center’s assistant general counsel, wrote in answers to questions about the company’s Ohio lobbying campaign.

The company, like others in the business, says it helps people on the financial edge get through to the next paycheck. Mr. Dumler said consumers would otherwise have to use “more-costly short-term credit, such as overdraft protection, late fees, and offshore Internet lending.”

Consumer advocates and antipoverty activists say poor borrowers often have to take out other loans to pay off the initial ones, accumulating penalty fees and debts several times the value of the original loans.

These arguments caught the attention of state lawmakers from both parties, as well as Gov. Ted Strickland, a Democrat, who last week threw his weight behind the idea of a rate cap. “Greed is a nasty business,” said state Rep. William Batchelder, a self-described Reagan Republican from Medina County and one of the main sponsors of the rate-cap bill.

Credit Slips give a nice recap of the action so far this week (!) on the efforts to impose tougher rules on mortgage lenders. I recommending reading the entire post, but the juiciest bits were at the beginning and end:

Here’s a mortgage crisis chronology for this week, as reported by the New York Times and Washington Post. Can you guess what these articles have in common?

On Sunday, Michelle Singletary’s The Color of Money column discussed Treasury Secretary’s Henry Paulson’s recommendation to create a Mortgage Origination Commission that would promulgate standards for mortgage loan officers and would rate and report state efforts to license and regulate mortgage brokers. In her view, a new Commission isn’t needed. Instead, she argues that what we need to do is send some of these people to jail. Rather than have a commission talk about their fraudulent acts, she suggests that we need to criminally prosecute loan officers who have engaged in fraudulent lending activities…..

So what do these news reports have in common? First, the mortgage industry seems unwilling to voluntarily reform itself. Second, any attempt to regulate the industry will be met with the claim that doing so will do no good and will only exacerbate the credit crisis. Third, no one in the government seems to want to take truly bold steps to do anything meaningful anytime soon, and everyone seems happy to engage in long discussions (in committees or on commissions) about the housing crisis. Fourth, the Fed and members of Congress appear unwilling to alienate the powerful financial services industry.

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  1. Richard Kline

    All parties working in the predatory retail lending sector give leeches a bad name: the latter little buggers at least release anticoagulants which improve circulation. The pred cred lot by contrast stick in an IV needle and simply drain their hosts 15 cc at a time. The saddest fact of all about the cliets of legal loansharking is that they are in fact mostly desperate folks with almost no money on the nether margins of the cash economy; they know they’re being hosed but they have very few many burdens and very few options.

  2. Francois

    The predatory retail lending sector: brought to a location near you, courtesy of the Supreme Court of the US of A, who in its infinite wisdom, thought it was egregious to cap the God-given right of the financial industry to infinite profits.

    Somehow, I have the feeling my breakfast will be acting out for a while.

  3. DMD

    Seriously, the best thing for everyone OTHER than lenders is to just give them their head.


    Let them do whatever they want.

    Because they can’t make me borrow.

    They can’t make roughly 50% of my friends borrow either. The other 50% are starting to feel this way too. My crowd ranges from top-tier PhD people to working class (I’m egalitarian in my acquaintances). We’re all disgusted.

    At some point very quickly, the lenders will simply run out of people who are either
    1. Willing to borrow,
    2. Capable of repaying.

    Personally, if I buy a home in peninsular San Francisco, it may well be for cash, or fully collaterized money (which eliminates my risk while preserving my cash flow).

    I am a significant part of the way there. Amazing how much a person can save when not having to pay interest, taxes, maintenance, etc etc etc.

    Strangely enough, it’s not even the purchase price that is going to influence my decision the most. It will be my ability to handle the tax and maintenance load.

    Let the lenders have their way. It will result in massive deflation in housing, fast, as people move to very high down payments or cash. I don’t think they really understand that a very slight adjustment in consumer belief could result in a massive change of behavior. Or, they are contemptuous of the possibility.

  4. zak822

    All the insults in the world won’t matter. These people, at all levels, are getting paid big time, and for them, that’s the object of the exercise. “So what if the financial structure of the nation collapses, I got mine!” is the attitude of the day.

    Yes, “the Fed and members of Congress appear unwilling to alienate the powerful financial services industry.” They intend to get paid, in one form or another.

    We won’t see rate caps or anything else that might truly be effective. All we will see is some meaningless tinkering at the edges, and that will happen so Congress can say it did something.

    Y’all are asking for people to behave in a morally responsible fashion, and to sacrifice big bonus check while doing so. Ain’t gonna happen voluntarily.

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