The following is from an email which Whitney Tilson sent to ValueWalk.

Also make sure to check out-  Whitney Tilson on his new big short, Whitney Tilson on K12 ‘My response to Dear Whitney – Are we having fun yet?’,  and  Whitney Tilson On Why He Loves 3D Systems As a Short

This entire email is focused on the many ways our banks and other financial companies prey on people. As I’ve written many times before, I have yet to find ANY financial product – mortgages, credit cards, debit cards, auto loans, student loans, installment loans, payday loans, check cashers, pawn shops, medical loans (a new one! See below) – in which there isn’t substantial predatory/exploitative behavior by various financial players, ranging from the biggest banks all the way down to the bottom feeders. And, as many of the articles below underscore, especially Making Money Off the Poor, the people who are victimized the most are those who can least afford it: the poor and less educated, living paycheck to paycheck, one illness away from bankruptcy. Here’s hoping the Consumer Financial Protection Bureau (and other regulators) can make a dent in the sorry state of affairs…

 

Whitney Tilson K12
Courtesy of Kase Capital

1) Floyd Norris on how unpopular big banks are (here’s an idea: stop exploiting people!):

It’s no fun to be a banker these days.

It is not just the increased regulation. It’s the lack of trust.

“At what point does this stop?” asked Gary Lynch, the former director of enforcement for the Securities and Exchange Commission who has gone on to jobs with many leading Wall Street firms and is now global general counsel at Bank of America. He was referring to the escalation in penalties being levied on banks, culminating in the $13 billion JPMorgan Chase was forced to pay for a series of transgressions.

Speaking at a banking industry conference last month in New York, Mr. Lynch recalled that he had been working at Morgan Stanley in London before he returned to this country in 2011 to join Bank of America. He had thought, he said, that by then — three years after the collapse of Lehman Brothers set off the financial crisis — anger at banks would have declined.

He was wrong: “It was worse.”

One small error in the article: “Iceland and Ireland went broke because they had to, or chose to, bail out their irresponsible banks.” Actually, in the smartest move by any government in the financial crisis, Iceland DIDN’T bail out its banks.

 

2) In May, ProPublica did an in-depth expose (www.propublica.org/article/installment-loans-world-finance) of how installment lender World Acceptance (whose stock I’m short) preys on poor people. I predicted then that it would win a Pulitzer and I’m now even more confident of this after reading this related expose of how high-cost lenders of various types (including WRLD) file tens of thousands of lawsuits each year which are highly profitable yet of course torment and ruin their customers. What a complete, total, utter disgrace that some states allow this type of behavior!

  • ·         How does a $1,000 loan turn into a $40,000 debt? It’s what can happen when high-cost lenders use the courts to collect.
  • ·         High-cost lenders frequently sue their customers. Since the beginning of 2009, high-cost lenders have filed more than 47,000 suits in Missouri and more than 95,000 suits in Oklahoma.
  • ·         When high-cost lenders sue, some states allow them to pile on extra costs – like charging borrowers for the cost of suing them. One major lender routinely charges legal fees equal to one-third of the debt, even though it uses an in-house lawyer.
  • ·         High-cost loans already come with steep interest rates. But in some states, small debts can continue to accrue interest even after a lawsuit is resolved. In Missouri, there are no limits on such rates – and that’s how a $1,000 loan turns into a $40,000 debt.

3) What these lenders do it even more despicable when they’re victimizing our servicemen and women – or their spouses, when they’re serving in Afghanistan, etc. From the front page of yesterday’s NYT. Mentions installment lenders:

Petty Officer First Class Vernaye Kelly winces when roughly $350 is automatically deducted from her Navy paycheck twice a month.

Month after month, the money goes to cover payments on loans with annual interest rates of nearly 40 percent. The monthly scramble — the scrimping, saving and going without — is a familiar one to her. More than a decade ago, she received her first payday loan to pay for moving expenses while her husband, a staff sergeant in the Marines, was deployed in Iraq.

Alarmed that payday lenders were preying on military members, Congress in 2006 passed a law intended to shield servicemen and women from the loans tied to a borrower’s next paycheck, which come with double-digit interest rates and can plunge customers into debt. But the law failed to help Ms. Kelly, 30, this year.

Nearly seven years since the Military Lending Act came into effect, government authorities say the law has gaps that threaten to leave hundreds of thousands of service members across the country vulnerable to potentially predatory loans — from credit pitched by retailers to pay for electronics or furniture, to auto-title loans to payday-style loans. The law, the authorities say, has not kept pace with high-interest lenders that focus on servicemen and women, both online and near bases.

…Yet government agencies are now scrutinizing some of these financial products, including installment loans, which have longer repayment periods — six to 36 months — than a typical payday loan.

There is a growing momentum in Washington to act. On Wednesday, the Senate Commerce Committee convened a hearing on abusive military lending. And the Defense Department has begun soliciting public feedback on whether the protections of the Military Lending Act should be expanded to include other types of loans.

“Federal protections are still insufficient” to protect the military, said Senator Jay Rockefeller, the West Virginia Democrat who is chairman of the Commerce Committee.

Interest rates on the loans offered by companies like Just Military Loans and Military Financial, can exceed 80 percent, according to an analysis by the Consumer Federation of America.

4) An article that highlights the abuses of payday lenders:

A lot of people are making money off the poor. The Center for Responsible Lending, a North Carolina nonprofit that tracks predatory lending practices, issued a revealing report earlier this month on payday loans, which carry annual interest rates as high as 400 percent. Using data compiled by the Consumer Financial Protection Bureau, the center found that most borrowers repeatedly rolled over or renewed loans.

The center’s analysis also found that “the median annual income of a borrower was $22,476, with an average loan amount of $350.” Most crucially, though, the median consumer in our sample conducted 10 transactions over the 12-month period and paid a total of $458 in fees, which do not include the loan principal. One-quarter of borrowers paid $781 or more in fees.

You might think these companies are making enough money from their usurious interest rates, but the center’sreport makes it clear that payday lenders are dependent for profits on borrowers who take out repeated loans:

The leading payday industry trade association — the Community Financial Services Association (C.F.S.A.) — states in a recent letter to the C.F.P.B.,“[i]n any large, mature payday loan portfolio, loans to repeat borrowers generally constitute between 70 and 90% of the portfolio, and for some lenders, even more.”

5) New York State’s financial regulator, Benjamin M. Lawsky, is one of the few doing anything to rein in abuses:

Government authorities are trying to choke off the supply of borrowers to online lenders that offer short-term loans with annual interest rates of more than 400 percent, the latest development in a broader crackdown on the payday lending

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