FAIR MONEY

Face to Face with Inequality


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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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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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Anatomy of Predatory Credit

Predatory lending in a nutshell

Predatory lending in a nutshell

The Pew Research Center’s payday loan infographic is helpful, but it doesn’t quite show what sort of a trap you fall into when you borrow the same $375 loan over and over again without ever paying off principal. Their latest study on the payday loan industry reports that only 14% of typical payday loan borrowers have room enough in their budget to pay off the loan in full. Another interesting finding from the same report is that 27% of payday borrowers also end up with overdraft fees from the bank when the payday lender withdraws the full amount of the loan. That would mean you pay $85 or more for the privilege of disposing of $375 for the duration of two weeks.


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The State of Consumer Banking

The New York Times has a report on banks colluding with online loan sharks to defraud their low-end customers:
1. The banks charge overdraught fees when the loan sharks’ automatic withdrawals cause the borrower to be overdrawn.
2. They will let the loan sharks take only the interest on the loan even when the borrower wants to pay it back in full, so that the loan is rolled over and another round of fees can be levied.
3. When people try to stop the automatic withdrawals, the banks do not honor their requests.
4. When the borrower tries to close the bank account against which automatic withdrawals are being made, the bank will keep it open and charge fees every time the loan sharks come for a withdrawal.

Yet another incentive to stop patronizing regular banks and find a local credit union instead.