The "Giant Sucking Sound" Recession--What Ross Perot Did Not Tell Us

A month ago I gave testimony at a Texas Senate committee concerning bills to close a loophole in Texas lending law.  Last week I had another opportunity to speak before the Texas House of Representatives Committee on Pensions, Investments, and Financial Services.  The loophole has allowed an abuse of the Credit Service Organization (CSO) law, designed to regulate businesses who help people with bad credit "repair" their credit.  To operate, they need to charge fees, and this law sets the terms for their operation.  They are not lenders, but provide a service.

Unscrupulous lenders came along and decided to create a business model which would make use of this law to prey on borrowers who believe they cannot get traditional loans from banks, credit unions, or consumer credit storefronts.  These lenders claim to be CSOs.  Officially, they are not the lenders.  They have a cozy relationship with a lending organization which operates under the restrictions of the usury laws.  Therefore, the borrower gets a loan at a low rate of interest around 1% per month.  THE CATCH is that in order to get this loan, the payday lender or car title lender charges a CSO "fee" of $20 per $100 for a 10-day or 14-day or 30-day loan.

That "fee" is really interest, masquerading as a CSO fee.  The loans cannot be paid in installments.  If they can't repay the whole amount of the short-term loan, the "CSO" can arrange another loan for another "fee."  Let's get this straight.  On a regular schedule, the borrower pays a "fee" in order to keep a loan from going into default.  The principal does not decrease, and a "new loan" replaces the "previous loan."  Again, the borrower is forced to come up with the entire principle within a few days or face another "fee" to get a "new loan."  I'm setting a record for scare quotes here.  That is a bunch of technicalities and paperwork to bury the truth that lenders are charging usurious interest rates on short-term loans designed to be hard to pay off.

If I pay a $20 (20%) fee to use $100 for a month, the annualized rate is 240%.  On this business model, if I am living close to the edge in my finances and the month lasts longer than the money, I could end up paying $240 in a year without paying off any of my $100 debt.  The average short-term payday loan is $300 to $500, so the amounts would be three to five times as much as this case:  $720 to $1200.  But that is for a 30-day term, while most payday loans can recycle two or three times a month, charging "fee" after "fee" after "fee."

Pastors, priests, and church community ministers from around the state delivered testimony about the effects of payday lending on their parishioners and neighborhoods, along with the Better Business Bureau, United Way, and City Government:  Del Rio, San Antonio, Houston, Midland, Dallas, Austin, Fort Worth, Palestine, LaPorte, El Paso, and all around the state.  Thanks go out to Suzii Paynter of Texas Baptists, to Texas IMPACT, and to the Texas Catholic Conference for their leadership in this effort.  Only two lobbyists stood up to oppose the bill.  I guess they could see what was coming and decided to do their work behind the scenes.  We found out that day that $8 million has been spent by the payday lending industry to kill this legislation, so I was not fooled into thinking that they were conceding this fight.  In fact, it seems they are increasing their efforts.

Sadly, the chair of the committee, Rep. Vicki Truitt of Tarrant County, who treated us all with respect on the day of the hearing (even if she did think I was talking too loud), has come out against closing this loophole in the name of "finding a compromise which can keep these lenders in business."  In other words, she is caving in to the industry demand for higher interest rates even though there is no credible evidence that people using these predatory financiers would not be able to get a loan if the loophole is closed.  Maybe some kinds of lending businesses would close, but the lending will go on at rates less likely to create a system of permanent indebtedness.  If fairer lending goes on, then the jobs the lending provides will not go away.  Reps. Ken Legler of Harris County, Rafael Anchia of Dallas County, and Marc Veasey of Tarrant County all seemed very knowledgeable about this issue, but it was not clear where on the committee there was strong support for closing this loophole.

What these businesses do is target communities of very low income working poor.  In Austin, they targeted school teachers when the press was claiming as many as 30% of teachers could be laid off before the coming school year.  They locate in clusters in order to make as many short-term loans as they can to people who are led to believe they have no other options.  They feed off each other's business because people take out a second loan down the street to pay off the fees on the first loan.  In the process, we hear what Ross Perot once called a "giant sucking sound."  That is the sound of low- and middle-income paychecks being sucked out of their communities into the executive bonuses of the payday lending corporations.

This entire recession is about that giant sucking sound.  It started with mortgage-backed securities, and when the demand for those grew, it became a feeding frenzy of sub-prime lending, speculative real estate pricing, and a housing bubble.  Then it matured into a labyrinth of credit default swaps and bonus-incentivized selling of toxic assets, creating an unregulated house of cards which crashed on the backs of the middle class workers.

What follows is the testimony I offered on March 22.  It is similar to what I said at the Senate committee in February, but reorganized and tweaked at a few points.  You can hear it down below.

My name is Dr. Mike Broadway.  I am a Baptist minister and theological professor living in Salado.  I come representing myself and any citizen offended by predatory lending.

         I have been working for the past two years with pastors, seminary professors, and all sorts of church people to address economic injustices pertaining to predatory lending and usury in its many forms, from high credit card fees, to foreclosure abuse and fraud, to tax refund loans, to predatory payday lending. 

My colleagues and I have met with top executives of Bank of America and Wells Fargo/Wachovia, with AGs Tom Miller of Iowa and Roy Cooper of NC who are leading the national investigation into foreclosure fraud, and with congressional leaders in various states and Washington, DC.  Predatory lending is a national problem, and it is a local problem, that has to be addressed on every front.  I’m here today because you have a chance to make a difference for the citizens of Texas.

         The biblical tradition makes a clear statement concerning usury, or unjust lending practices.  It says that no society can be a just society if it allows lending practices that create and maintain a permanent debtor class.  Laws against usury go back at least four thousand years, more broadly than the Jewish and Christian traditions.  Yet the writing of new laws in Texas and across the US as recently as 1979, 1980, and 1987 has ignored the wisdom of millennia and allowed the protections against usury to be swept away. 

         Lenders claim when they speak to you and to the press that they have to be able to charge usurious rates to stay in business.  They must be terribly inept financiers, because for four thousand years financial institutions have flourished under regulations against usury.  Why do these people need to make so much more in interest?  They don’t.  There are many current business models which flourish serving the communities where payday lenders do their predatory work, but without preying on their customers.

         Payday lending as we know it is a new financial form of sharecropping.  It is debt sharecropping.  Just like the unfair systems which kept sharecroppers always indebted to the landowners whose land they cultivated, payday lending places barrier after barrier in the way of borrowers in order to maintain a subscription to their future income. 

The business plan is perpetual indebtedness for those who are struggling to make ends meet.  Portraying themselves as a friend who is doing a service, they draw people into the trap of usurious borrowing.  Under the guise of being a CSO, these lenders are “the guy who knows a guy who can get you the money right away, but it’ll cost you.”  We all know what to call this kind of lender:  the term is loan shark.

         The current law allows this trap to be set.  The law has a loophole, and predatory lenders squeezed through it and stretched it wide.  One of their favorite deceptions is the doublespeak that calls interest by another name—a fee.  But if I borrow money from you, and you charge me for borrowing the money, then that is interest, no matter what you call it. 

The ancient text of Deuteronomy makes it very clear that usury is usury, whether you collect a fee up front, you charge it along the way, or you claim it at the end of the agreement.  Playing with the words, this smoke and mirrors, uses a loophole in the letter of the law in order to disregard the spirit of the law.  It also ignores what Jesus called the weightier matters of the law, justice and mercy.

         Rampant injustice in CSO lending is why you must close this loophole.  Stand in the heritage of Texas, a heritage of protecting workers and homeowners from usury, protecting us from large national corporations who suck the life out of neighborhoods so that they can pay huge bonuses to executives who have devised these schemes of debt sharecropping.

Response from State Representative after servant church action

I should follow up on the previous entry about servant church.  I wrote a letter to my state representative, Ralph Sheffield from Bell County, asking for specific action to prevent massive cuts to the education budget in Texas.  One of those actions was to support the use of a "rainy day fund" to plug the gaps in education funding.  If this recession isn't a rainy day, I don't know what would be.

I got a call yesterday from one of Rep. Sheffield's staff.  This is pretty unusual, I think.  I've not gotten very many such calls in my lifetime.  He told me that Rep. Sheffield was one of four legislators who had signed on to a bill to use the rainy day fund for education a couple of weeks ago.  As he explained, this was even before the Governor had come out in favor of using money from the rainy day fund.  Apparently, they were paying attention to our letters.

I went on to talk with him about HB 410 and closing the loophole in the law that has allowed payday lenders and car-title lenders to twist the law and charge "fees" that amount to 500% and more for short-term loans.  I'll follow up later to see how he stands on that legislation.

It's a Nationwide Fight Against Predatory Payday Lending

For numerous years, a fight has been going on from state to state and on a national level to curb and stop usurious payday lending.  This loan-sharking business exists by finding the cracks in the laws.  They hire sophisticated lawyers to find the legal loopholes, and slick PR firms to explain why they fill a need in the credit market.  They prey on desperate people and pretend to be a friend of the people who need credit.  The real nature of their business, however, is to be debt sharecroppers.  They gain an interest and claim on a person's future income in perpetuity.  It is a business designed to entrap borrowers so that they can never get out of debt.

I'll get a chance to speak about this predatory business at a public hearing on Tuesday, February 22, at the Texas Senate Committee on Business and Commerce.  I am impressed with the work of Texas Faith for Fair Lending, at whose invitation I will be speaking.  Some of these folks are the ones I used to work with as a wet-behind-the-ears seminary graduate in the mid-1980s.  In those days, these organizations were working to protect and provide for children in poverty and trying to hold off the tsunami of state-sponsored victimization through gambling businesses.  Suzii Paynter of the Texas Baptists Christian Life Commission will be part of the fight, and I am proud to get to work with such a distinguished drum major for justice.  The quoted material below comes from the Texas Faith for Fair Lending web site.  You can read the original at this link.

Payday Lenders and Car Title Lenders Evade Existing Texas Lending Laws

Although Texas lending laws provide generous regulatory and fee structures, payday lenders and car title lenders sidestep these provisions by posing as credit services organizations (CSOs), giving them an unfair advantage in the lending landscape.  As CSOs, payday and car title lenders operate outside of the bounds of the rules set for all other consumer lenders in the state and exploit a state law designed to protect consumers from seeking credit repair help. Both payday and auto title lenders could operate under Ch. 342.  For the smaller loans, auto title lenders could use the rate computations under 342F (or 342E).  For larger loans, they could operate under 342E.ⁱ

Below is a comparison of Texas's existing lending law which payday and car title lenders evade, and a snapshot of their abusive practices permitted by the CSO loophole.

It's Time to Level the Playing Field. 

The state's CSO statute was designed to protect consumers from abuse when seeking credit repair help, not as a vehicle for loans that result in long term indebtedness.  After more than 5 years of permitting this evasion of state law to continue, it is time for legislators to close this loophole, and ensure that these lenders operate under the Texas lending laws in place for all other consumer lenders.  It's time to close the loophole.

__________________

ⁱ The maximum loan under subchapter F is $1,240.  Under subchapter E, loans of up to $15,000 may be made.

ⁱⁱ Under existing Texas lending laws, finance charges for payday loans are set by the Texas Office of Consumer Credit Commissioner (OCCC).  Texas OCCC's authority to set these rates comes from TFC § 342.007, which allows the finance commission to establish rules for payday loans, and in TAC § 83.604(c) which incorporates the fees by reference.  For current Texas OCCC rates, see http://www.occc.state.tx.us/pages/int_rates/Index.html and click on the link for “Deferred Presentment Transaction Rate Charts.”  However, instead of complying with this law intended for them, payday lenders operate as CSOs, for whom there is no limit on finance charges, and rates reach upward of 500% APR (and higher) fur a loan that typically has a 14-day term.

ⁱⁱⁱ Under existing Texas lending laws, car title loans can carry finance charges consisting of a $10 set fee, plus $4 per $100 a month installment charge.  Car title loan finance charges are authorized under TFC § 342.253, which incorporates the fees permitted by TFC § 342.252 (3).  In addition to these finance charges, under existing Texas lending law, TFC § 342.502 (b) (5) expressly permits a “fee for recording a lien on or transferring certificate of title to a motor vehicle offered as a security for a loan.”  (The recording fee is not included in APR calculations because they are excludable from inclusion in the finance charge under the federal Truth in Lending, Act, Reg. Z § 226(e) (l).)  However, instead of complying with these state lending laws intended for them, car title lenders operate as CSOs, for whom there is no limit on finance charges, and rates reach upwards 300% APR fur a loan that typically has a 30-day term.

^iv Regardless if the cost is classified as "interest” or “fees” under state law, the cost to the borrower is the same.  The federal Truth in Lending Act requires that both interest and fees be combined and disclosed to borrowers as an Annual Percentage Rate (APR).  Federal law requires the cost of the all credit to be disclosed in terms APR, regardless of whether the loan is for two weeks or two years.

^v Existing Texas laws expressly permit payday loans to use a borrower's post-dated check as collateral for the loan, and expressly permits car title loans to use a borrower’s title to her car as collateral.  For payday loans, see TAC § 83.604 (b) (“The check given in the [payday loan] transaction may serve as security for the payment of the loan.”).  For car title loans, car title as security is not expressly prohibited under TFC § 342.503 and is stated as a permitted practice for authorized fees in TFC § 352.502 (b) (5).  However, even though the CSO statute does not expressly allow any of these collaterals, these payday and car title lenders operating as CSOs use checks and car titles as collateral respectively, as well as electronic access to a borrower’s debit account and a letter of credit issued by the CSO.

^vi Under existing Texas lending law, payday lenders and car title lenders, just like all other consumer lenders and brokers, are subject to oversight by the Texas OCCC.  Although CSOs are subject to private litigation and oversight of the Attorney General, these provisions have proven insufficient to protect consumers against abusive high cost lending.  CSOs are the only entities engaged in consumer lending transactions that escape oversight and compliance requirements of the OCCC.

I'll let you know how it goes.  This will be a first for me.

Banks Sucker Punch Military Families

As part of the work on resetting the economy, North Carolina United Power and the IAF-SE have been pressing for banks to obey the law in dealing with loans to military personnel.  The law, revised in the past decade, says that when soldiers are on active duty, all of their loans must be capped at 6%, and any existing interest above that level must be forgiven.  Moreover, when they are on active duty and three months beyond, a bank cannot start foreclosure proceedings or other debt recovery strong-arm tactics. 

We took up this cause because we were hearing many stories about how banks were not following these laws.  And that does not even take into account all of the predatory lenders, loan sharks, and such who open for business just outside the gates of military bases.

We made good progress in these negotiations with big banks and with NC government officials.  Bank of America was especially responsive, offering unilaterally to extend the grace period law demands from three months to nine months.  By doing so, they give room for the new shape of military deployment which relies heavily on National Guard and Reserves and which has led to numerous sequential tours of duty.  The law did not anticipate this change, and it has hurt many military personnel whose cases have not been handled correctly.

In case anyone wondered whether this is a real problem, a recent news article points out that at least one major bank, has admitted to breaking the law in dealing with military families.  J.P. Morgan Chase was foreclosing on military families while they were bearing the weight of active deployment.  The article names only a few cases.  I suspect that a committed investigative reporter would find many, many more at all major banks, in regional and local banks, and an explosion of cases among payday lenders, car title lenders, and other criminally conceived businesses trying to fly under the radar.

Let me again acknowledge Bank of America for its promises to improve services and go beyond the letter of the law in working with military families.  We have had some hopeful conversations with Wachovia-Wells Fargo who has had experience operating a specialized military bank out of San Antonio, TX, but they have not made any commitments in response to our requests.  Obviously, J.P. Morgan Chase has had to come clean on a few cases.  I hope some other groups working toward economic justice will raise these questions locally to stop the sucker punching on these families who already face stress and problems beyond what anyone should have to face.

Why 10% in 10% Is Enough?

My friend and colleague Dan Rhodes posted an article on the "10% Is Enough" campaign over at the "Call and Response" blog of the Faith and Leadership program at Duke Divinity School. In a few paragraphs, he offered an brief overview of the campaign and some of the reasoning behind it. One comment chastised him for not providing an adequate analysis of the economics of consumer credit, its risks, and its basic operational principles. Dan gave a good response, acknowledging that in the short piece he could not cover everything. He also added some additional historical economic factors which are necessary to keep the discussion from pretending to be merely a technical discussion of "laws of economics." I am including here some comments I added to his post.

For centuries, banks were very profitable businesses operating under usury caps. Why are banks in our day so much more inept? Not all banks in the world charge high interest rates for credit. Why are US banks so much more inept at doing business?

We know that "risk" is calculated using benchmarks and tables and actuarial information based on certain assumptions. Of course, the assumptions may include demographic data and statistical probabilities that many can agree upon.

These assumption also include an assumed "cost of doing business" that includes the irrational exuberance of contemporary stockholders wanting short-term profits, the arrogance of CEOs with 8 figure packages, and big bonuses for executives known as "talent" who helped to bring about the economic crash. Consequently, none of the big banks is willing to name a rate of interest they believe to be too high. When asked by Congress if 36 % was too high, not one bank president would answer.

Wells Fargo/Wachovia recently introduced a new "product" for its customers. They will advance money at the end of the month to help a customer get through. Down the street from the bank, the little storefront calls this a "payday loan." Wells Fargo/Wachovia offers this "service" for an annual interest rate of 120%.

So if the banks want to be forthcoming about their cost of doing business, and if they will consider outside analysis of where they are spending frivolously, then we will be in a position to discuss what rate it would take to keep credit fair for customers, profitable for banks, and safe for everyone.