FAIR MONEY

Face to Face with Inequality


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Bank Robbery

In May of this year, Rose graduated from college with a Bachelor’s in Business Administration. She was flying high: she had her degree, she had started her own business, a nail salon, which was close to running a profit, she liked living in San Jose with her boyfriend. Life was good, and she was taking a vacation with her parents to celebrate her achievements.

The first thing that augured a problem was pretty innocuous: a credit card purchase was declined. These things happen, and Rose didn’t pay too much attention. She was on vacation after all. Next, she got an email that her credit limit was increased to $1900, from $1500, without further explanation. A week or so later, she found out that the Wells Fargo bank account she used for internet purchases was wildly in the red. How could this have happened?

Someone had gotten into Rose’s bank account, which had  $25 in it at the time, and siphoned about $1400 to Western Union, where it becomes essentially untraceable. The bank account is linked to her credit card–the one for which the credit limit was raised. The fraudulent transaction went through, but since the credit limit on her card was insufficient to cover the amount, she ended up maxed out on her credit card and in the red on her bank account.

Rose appealed to Wells Fargo for help, but all they did was slap her with one overdraft fee after another. Everyone she talked to said it was not their fault. They said they would investigate, but only after she had reported the theft to the police and to the FBI. Even so, they didn’t offer her much hope of recovery. She went to the police, to see if they would help her, but they said there was nothing they could do. And the overdraft fees kept coming. She went to the FBI, because the money had crossed state lines, given the involvement of Western Union, they said there was nothing they could do. And the overdraft fees kept coming.

Now Rose had to borrow money to stop the overdraft bleeding. She requested a personal loan, to get back into the black, but the overdraft fees had ruined her credit score and the bank declined to give her the loan. And the overdraft fees kept coming. She tried other banks, but they declined to help her for the same reason. And the overdraft fees kept coming, the overdraft fees kept coming. So Rose tried to get a payday loan, but all they can give you is $400 and by now she needed thousands. She tried crowdfunding to come up with the money, but she didn’t make her goal and came up with zero. And the overdraft fees kept coming.

In more and more desperate straits, Rose turned to her family and asked for help. She had hesitated, because in her community it is embarrassing to owe money, even if it’s not your fault. At first, her family didn’t understand her situation. When they finally did understand, they told her they didn’t have anything to spare. And, remember, all this time, the overdraft fees kept coming. In all, it took about a month for the bank to put her $3000 in the red.

Eventually Rose gave up and turned to an online usury outfit, loanme.com, which offered her a $3100 loan,  took $100 off the top in fees, and then started charging her  an interest rate of 135%.

By now Rose has two jobs. She’s a carrier for Amazon, with irregular hours. She has another part-time job, also with irregular hours. She’s running her nail salon–which generates just enough revenue to allow her to pay her employee. And she’s looking for a better-paying job to be able to pay back that loanme.com loan. She hopes to pay  off that loan before the end of the year, because in January her student loans kick in. So far, she has paid $800 to loanme.com, of which $2.00 went to reduce the principal, meaning she still owes $3098. What if she can’t pay it off before January? “Then I’m screwed,” Rose explains.

So here’s the score:

  • Thief takes about $1400 (illegally, but with impunity).
  • Bank takes something on the order of $3000 (totally legally).
  • Loanme.com takes at least another $3000 or so (legally) if Rose pays off the loan by December. Much more if she can’t (also legally).

They are pretty much indistiguishable, except the legal ones seem to have more leverage.

So what to do? There are a few things:

Any other ideas? Please let us know. We’d love to hear them.

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Explosion in Payday Lending Coverage

I just listened to a great podcast from NPR’s On Point that handily sums up the recent attention payday loans have been getting. They start off with Google’s recent ban on payday loan advertising and the recent Atlantic article on payday lending, then dive into a far-reaching discussion about the payday loan industry and its effects.

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Source: The New York Times

Plenty of attention is given the systemic issues leading to people taking out payday loans (even the payday industry rep agrees). Lots of attention for postal banking as a potential alternative, too.

There’s a beautiful moment in the piece where one of the guests fields a call from a financial planner. The caller trots out the tired personal responsibility line, in response, the guest makes it known that low-income people are, generally, Good with Money, and the problems go far beyond the individual.

One of the guests is Mehrsa Baradaran, author of How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy. This looks like a great book for the summer reading list.

 


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What Would Happen … ?

This Sunday’s New York Times has an editorial by Lee Siegel about refusing to repay one’s student loans, as Siegel himself has done.  He suggests that if only more people would follow his example, a long sequence of  good things would start to happen. At the end of this sequence, like the pot of gold at the end of the rainbow, we will find affordable higher education.

The collection agencies retained by the Department of Education would be exposed as the greedy vultures that they are. The government would get out of the loan-making and the loan-enforcement business. Congress might even explore a special, universal education tax that would make higher education affordable.

There would be a national shaming of colleges and universities for charging soaring tuition rates that are reaching lunatic levels. The rapacity of American colleges and universities is turning social mobility, the keystone of American freedom, into a commodified farce.

If people groaning under the weight of student loans simply said, “Enough,” then all the pieties about debt that have become absorbed into all the pieties about higher education might be brought into alignment with reality. Instead of guaranteeing loans, the government would have to guarantee a college education.

Sounds nice. But it might perhaps be a slight bit optimistic.


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CFPB Takes Action?

FAIR Money came to be out of frustration with the CFPB, which initially declined to tackle payday loans. But now some new rules appear to be under consideration, according to this press release. Here’s the summary:

[CFPB] “is considering proposing rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans. The proposals under consideration would also restrict lenders from attempting to collect payment from consumers’ bank accounts in ways that tend to rack up excessive fees. The strong consumer protections being considered would apply to payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans.”

Better late than never. But it will be interesting to see what happens if the new rules go into effect. In all likelihood, the people who need emergency cash the most will be the least likely to be underwritten, if a means test of some sort is applied. So then what? It could create an opening for more communitarian, informal solutions to deal with cash crunches. Or it could drive more folks into the arms of the internet lenders.


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Breaking Up with Credit Cards

CNN Money has an article on young people and credit cards, which shows a decrease in credit card debt and a related increase in credit scores for people aged 18 to 29. Apparently, there are multiple causes, including an aversion to credit card debt among young people AND an aversion to young people among credit card issuers.

Oh, and then there is the aggressive campaign to get people to start using prepaid cards, where the fees are all up-front and the risk is all on the side of the consumer.