By Paul Kiel
In 2013, ProPublica published an investigation of the subprime lender World Finance. World was charging annual interest rates that could exceed 200 percent, often trapping customers in cycles of debt by enticing them to renew the loans over and over. In states where laws barred such high rates, the installment lender loaded many loans with nearly useless insurance products that bloated the cost. The company boasted over 800,000 customers, part of an installment loan industry that claimed to loan to millions.
The following year, World disclosed that it was under investigation by the Consumer Financial Protection Bureau. The CFPB, the brainchild of Sen. Elizabeth Warren, D-Mass., was created by the 2010 Dodd-Frank financial reform bill, and under the leadership of Richard Cordray, the agency took action against credit card lenders, mortgage servicers, payday lenders and others for unfair practices against consumers.
But after Cordray left last November, President Donald Trump installed Office of Management and Budget head Mick Mulvaney as acting director. To say that Mulvaney has been a critic of the CFPB is a vast understatement. In a 2014 interview given when he was still a Republican congressman, Mulvaney said of the CFPB, “some of us would like to get rid of it” and called it “a joke … in a sick, sad kind of way.”
In the past month, Mulvaney’s influence has become increasingly apparent. The CFPB announced it will “reconsider” its landmark rule on payday loans, which was issued last year and aimed to prevent borrowers from getting stuck just paying the interest again and again on such loans because they could not afford to pay them off. The next day, the bureau announced it would be inviting comment on all aspects of the CFPB’s business “to suggest ways to improve outcomes for both consumers and covered entities.” It has also begun to drop enforcement actions.
950% interest rates
Last week, it dropped a lawsuit against a group of payday lenders that charged interest rates that touched 950 percent. The companies were associated with a Native American tribe, a common dodge the industry has used because it allows lenders to evade state interest-rate caps.
In the latest sign that the Consumer Financial Protection Bureau is pulling back from aggressive enforcement, it dropped an investigation triggered by a 2013 ProPublica story about a lender that charges triple-digit interest rates.
And around the same time, it turns out, the CFPB also sent a letter notifying World Finance that it was dropping its investigation into the installment lender. The company disclosed the letter in a press release yesterday. Although the CFPB had not actually sued the company, it did notify World in 2015 that an enforcement action was likely, according to a company disclosure.
Protecting big companies, not consumers
Warren, in an email responding to questions about the CFPB’s decision, said the action showed Mulvaney was making good on his earlier vows.
“CFPB should protect consumers, not giant companies that use sky high interest rates to trap hundreds of thousands working Americans in debt,” she wrote. “Dropping this case is more evidence that Mick Mulvaney is just using his time at CFPB to pay back the donors who funded his political career.”
As the International Business Times reported today, World contributed a total of $4,500 to Mulvaney when he was a congressman from South Carolina, where World is headquartered.
The CFPB declined to comment. But in an email to CFPB staff today, Mulvaney laid out what the bureau’s new approach should be. He had “no intent in shutting down the Bureau,” he wrote, but said that his leadership would contrast sharply with Cordray’s approach of aggressive enforcement. The CFPB worked for all taxpayers, he wrote, and that includes “those who take loans, and those who make them” and “bringing the full weight of the federal government down on the necks of the people we serve should be something that we do only reluctantly.” Going forward, he wrote, there would be “more formal rulemaking on which financial institutions can rely, and less regulation by enforcement.”
No area of Americans’ financial lives will be quite so affected by the CFPB’s recent turnaround as high-cost lending. Prior to the CFPB’s existence, there was virtually no federal regulation of these types of loans, which are spottily regulated at the state level. Although public opinion generally runs against allowing interest rates in the triple digits, the industry is adept at evading state rules and gaining sway with state lawmakers.
The CFPB rule would have dramatically curtailed payday and other high-cost short-term loans, but notably would have left longer-term loans like those offered by World Finance untouched. That made the possibility of an enforcement action against World particularly noteworthy. But the industry can apparently now rest easy. Any near-term threats to its ways of doing business are likely to emerge from the states, where past fights over interest-rate caps have been contentious and sometimes ugly.
Read The Investigation — The 182 Percent Loan: How Installment Lenders Put Borrowers In A World Of Hurt
By Paul Kiel
One day late last year, Katrina Sutton stood at a gas pump outside Atlanta and swiped her debit card. Insufficient funds. But that couldn’t be. She’d been careful to wait until her $270 paycheck from Walmart had hit her account. The money wasn’t there? It was all she had. And without gas, she couldn’t get to work.
She tried not to panic, but after she called her card company, she couldn’t help it. Her funds had been frozen, she was told, by World Finance.
Sutton lives in Georgia, a state that has banned payday loans. But World Finance, a billion-dollar company, peddles installment loans, a product that often drives borrowers into a similar quagmire of debt.
World is one of America’s largest providers of installment loans, an industry that thrives in at least 19 states, mostly in the South and Midwest; claims more than 10 million customers; and has survived recent efforts by lawmakers to curtail lending that carries exorbitant interest rates and fees. Installment lenders were not included in a 2006 federal law that banned selling some classes of loans with an annual percentage rate above 36 percent to service members — so the companies often set up shop near the gates of military bases, offering loans with annual rates that can soar into the triple digits.
Many people know the dangers of payday loans. But “installment loans” also have sky-high rates and work by getting borrowers — usually poor — to renew over and over.
Installment loans have been around for decades. While payday loans are usually due in a matter of weeks, installment loans get paid back in installments over time — a few months to a few years. Both types of loans are marketed to the same low-income consumers, and both can trap borrowers in a cycle of recurring, expensive loans.
Installment loans can be deceptively expensive. World and its competitors push customers to renew their loans over and over again, transforming what the industry touts as a safe, responsible way to pay down debt into a kind of credit card with sky-high annual rates, sometimes more than 200 percent.
And when state laws force the companies to charge lower rates, they often sell borrowers unnecessary insurance products that rarely provide any benefit to the consumer but can effectively double the loan’s annual percentage rate. Former World employees say they were instructed not to tell customers the insurance is voluntary.
When borrowers fall behind on payments, calls to the customer’s home and workplace, as well as to friends and relatives, are routine. Next come home visits. And as Sutton and many others have discovered, World’s threats to sue its customers are often real.
The Consumer Financial Protection Bureau, the new federal agency charged with overseeing consumer-finance products and services, has the power to sue nonbank lenders for violating federal laws. It could also make larger installment lenders subject to regular examinations, but it hasn’t yet done so. Installment companies have supported Republican efforts to weaken the agency, echoing concerns raised by the lending industry as a whole.
The CFPB declined to comment on any potential rule-making or enforcement action.
Big profits off the poor
Despite a customer base that might best be described as sub-subprime, World comfortably survived the financial crisis. Its stock, which trades on the Nasdaq under the company’s corporate name, World Acceptance Corp., has nearly tripled in price in the last three years. The company services more than 800,000 customers at upward of 1,000 offices in 13 states. It also extends into Mexico, where it has about 120,000 customers.
In a written response to questions for this story, World argued that the company provides a valuable service for customers who might not otherwise qualify for credit. The loans are carefully underwritten to be affordable for borrowers, the company said, and since the loans involve set monthly payments, they come with a “built-in financial discipline.”
The company denied that it deceives customers, saying that it trains its employees to tell borrowers that insurance products are voluntary and that it also informs customers of this in writing. It said it contacts delinquent borrowers at their workplace only after it has failed to reach them at their homes and that it resorts to lawsuits to recoup delinquent payments in accordance with state laws.
“World values its customers,” the company wrote, “and its customers demonstrate by their repeat business that they value the service and products that World offers.”
The installment industry promotes its products as a consumer-friendly alternative to payday loans. Installment loans are “the safest form of consumer credit out there,” said Bill Himpler, the executive vice president of the American Financial Services Association, of which World and other major installment lenders are members.
About 5 percent of World’s customers, approximately 40,000, are service members or their families, the company said. According to the Defense Department, active-duty military personnel and their dependents comprise about 1 percent of the U.S. population. …
(Commoner Call photo by Mark L. Tayor, 2018. Open source and free to use with link to www.thecommonercall.org )