Economics

AFR: Private Equity, Hedge Funds Are Supercharging Payday Lending

Washington Private equity moguls have invested heavily in the payday and installment lending, putting additional resources, tangible and intangible, at the disposal of these often-predatory businesses, according to a new report by Americans for Financial Reform and the Private Equity Stakeholder Project.

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Payday Lending
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“Private equity firms have brought financial firepower and often a new level of sophistication to the subprime lenders they acquired,” said Jim Baker, a senior fellow at Americans for Financial Reform. “They have enabled some payday and installment lenders to buy competitors, securitize the loans they make, and engage in aggressive lobbying strategies to further their reach.”

The report, available here, documents 23 payday and installment companies in which private equity firms have invested, sometimes to acquire ownership stakes, other times to fund actual lending. The group includes companies that offer loans at triple-digit interest rates, that have run afoul of the Consumer Financial Protection Bureau, and that have bought their way into the political process to weaken or defeat state consumer-protection rules.

The development puts private equity firms in the position to profit from efforts by payday lenders to roll back an important new rule by the Consumer Financial Protection Bureau that would require lenders to verify the ability of borrowers to repay a loan — a common-sense protection arrived at after years of study. A bipartisan group of lawmakers has announced an attempt to roll back the rule under the Congressional Review Act.

“Billionaire owners of private equity firms could be some of the main beneficiaries of efforts to roll back CFPB’s payday rule and otherwise weaken regulation of subprime lending,” Baker said. “In recent years, private equity-funded lenders have been the subject of several investigations by the agency and other regulators and have paid out tens of millions of dollars in settlements.”

Article by Private Equity Stakeholder Project


Private equity piles into payday lending and other subprime consumer lending

Over the last several years, a number of private equity firms have acquired payday lenders and subprime installment lenders, funneling institutional capital from pension funds, foundations, endowments and others into enterprises that can trap consumers in a cycle of debt.

While they are by no means the only companies active in subprime consumer lending, through a series of mergers and acquisitions private equity-owned firms have become significant players in both the payday lending and subprime installment lending markets. In terms of brick-and-mortar stores, private equity firms own lenders with a total of more than 5,000 US locations. In addition, private equity and venture capital firms have provided capital for several startups making online payday loans, at times with triple digit annual percentage rates (APRs) rivaling payday lenders.

Currently, payday lenders charge triple digit annual interest rates, often 300 percent or higher. A large body of research has demonstrated that these products are structured to create a long-term debt trap that drains consumers’ bank accounts and causes significant financial harm, including delinquency and default, overdraft and non-sufficient funds fees, increased difficulty paying mortgages, rent, and other bills, loss of checking accounts, and bankruptcy. The lack of underwriting for ability to repay, high fees and access to a borrower’s checking account or car title enable lenders to repeatedly flip borrowers from one unaffordable loan to another. A large portion of borrowers eventually default, but often not before paying hundreds or even thousands of dollars in fees.

Private equity firms have brought new capital and in some cases a new level of sophistication to the subprime lenders they acquired, in some cases enabling the payday and installment lenders to buy competitors1, sell off securities based on the loans they make2, or engage in aggressive legislative and lobbying strategies.3

Some private equity-funded payday and installment lenders have run afoul of state and federal lending regulations or evade state laws governing consumer lending.

There is a list of private equity-owned subprime consumer lending firms active in US payday and installment lending at the end of this report. Some examples include:

JLL Partners — ACE Cash Express

Private equity firm JLL Partners of New York took payday lender ACE Cash Express private in 2006.4

Frank Rodriguez of JLL joined the ACE Cash Express’ board of directors.5 Rodriguez currently serves as Managing Director at JLL Partners and is a member of JLL’s Management Committee.6

Private Equity Supercharges Payday LendingACE Cash Express has over 1,000 locations in 23 states.7 ACE Cash offers payday loans, auto title loans, longer-term installment loans, prepaid debit cards, and other services online and through its branch network.8 In 2014, the Dallas Morning News reported that ACE Cash Express had an annual transaction volume of $14 billion and saw 40 million customer visits over the prior year.9

ACE charges as much 661% interest (APR) on a fourteen-day loan.10 Ace, like many payday lenders, has also begun migrating to long-term payday loans with advertised rates exceeding 200% APR.11 Payday lenders themselves have a long history of pushing the limits or outright ignoring consumer protection laws. ACE, in particular, has run afoul of state and federal regulators multiple times since JLL Partners took control.

In 2008, the California Commissioner of Business Oversight conducted a regulatory examination of ACE which found purported violations including that ACE collected excessive amounts from customers and conducted unlicensed payday loan transactions over the internet and at a branch office. In 2010, ACE entered into a settlement agreement and stipulation to a Desist and Refrain Order that issued approximately 2,512 citations against ACE and ordered it to pay $118,400 in penalties.12

In 2014, ACE agreed to pay $10 million to settle federal allegations by the Consumer Financial Protection Bureau (CFPB) that it used false threats of lawsuits and other illegal tactics to pressure customers with overdue loans to borrow more to pay them off.13

The CFPB alleged that ACE’s tactics trapped consumers in a cycle of debt:

“ACE structures its payday loans to be repaid in roughly two weeks, but its borrowers frequently roll over, renew, refinance, or otherwise extend their loans beyond the original repayment term. These borrowers typically incur additional interest and fees when they roll over, renew, or refinance their
loans.”

“ACE used false threats, intimidation, and harassing calls to bully payday borrowers into a cycle of debt,” said CFPB Director Richard Cordray. “This culture of coercion drained millions of dollars from cashstrapped consumers who had few options to fight back.”14

In 2015, the California Commissioner of Business Oversight sought to suspend ACE’s license to sell payday loans in California over a series of alleged lending violations and violation of the 2010 consent order ACE had signed with the state.15 ACE ultimately settled for a fine and continues to operate in
California.16

In 2016, State of Washington Department of Financial Institutions (DFI) examiners found that ACE had made more than 700 prohibited payday loans to more than 360 Washington borrowers, collecting more than $48,000 in loan and default fees. ACE Cash Express entered into a consent order with the Washington DFI and agreed to pay a fine.17 ACE appears to have ceased making loans directly in Washington, instead now serving as a lead generator for online lender, Enova (dba CashNetUSA).18

In 2015, The New Jersey State Investment Council, which invests pension funds on behalf of the state, tasked its director with exploring an exit of the state pension system’s commitment to a JLL Partners fund that owns payday lender ACE Cash Express. New Jersey law prohibits payday lenders from operating within the state.19

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