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…
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 industry.
New York State’s financial regulator, Benjamin M. Lawsky, sent subpoenas last week to 16 so-called lead generator websites, which sell reams of sensitive consumer data to payday lenders, according to a copy of the confidential document reviewed by The New York Times. The subpoenas seek information about the websites’ practices and their links to the lenders.
The move is part of an evolving push by state and federal officials to curb payday lenders and their practice of offering fast money tied to borrowers’ paychecks. In August, Mr. Lawsky sent cease-and-desist letters to 35 online lenders ordering them to stop providing loans that violate state usury caps to New Yorkers.
6) Good to see a court victory for Lawsky:
A federal judge has denied a request by two American Indian tribes to stop New York State’s top financial regulator from cracking down on their online lending businesses.
The tribes had argued that Benjamin M. Lawsky, superintendent of the state’s Department of Financial Services, overstepped his jurisdictional bounds in trying to regulate business activity taking place on Indian reservations in Oklahoma and Michigan.
Late Monday, Judge Richard Sullivan, of Federal District Court in Manhattan, issued a ruling dismissing the Indians’ claims. His decision suggests that when tribal businesses use the Internet to reach consumers beyond their reservations’ borders, they lose their federally protected rights as sovereign nations.
“Plaintiffs have built a wobbly foundation for their contention that the state is regulating activity that occurs on the tribes’ lands,” Judge Sullivan wrote. “The state’s action is directed at activity that takes place entirely off tribal land, involving New York residents who never leave New York State.”
In August, Mr. Lawsky’s office began an aggressive campaign against the payday lending industry, seeking to stamp out Internet businesses that offer small, short-term loans at exorbitant interest rates that violate state usury laws. Among the businesses he attacked were several that are run by, or have connections to, Indian tribes across the country.
7) Lest you think it’s just small banks and other financial companies engaging in this behavior, look at this list:
Deposit-advance loans are used by consumers with bank accounts to meet short-term needs such as a medical emergency or a car repair. Banks warn customers that such loans are intended to bridge a short-term cash shortfall and aren’t a long-term solution, but critics said banks are promoting unsustainable loans.
Customers who have their paychecks automatically deposited in their bank accounts can request an advance, typically as much as $500, which is repaid when it is deducted from the borrower’s next paycheck. Such loans typically have an annual interest rate of 120%.
A handful of banks, including Wells Fargo WFC +0.53% & Co., U.S. Bancorp, USB -0.36%Regions Financial Corp. RF +0.11% and Fifth Third Bancorp, FITB -0.79% offer deposit-advance loans, and regulators have been concerned more banks would start doing so as they are profitable.
Regulators said they are concerned banks don’t typically analyze whether deposit-advance borrowers can afford such loans, a departure from banks’ traditional underwriting standards for other products. The regulators also said they were concerned such products saddle consumers with unsustainable debts and carry high fees.
The loans “share a number of characteristics with traditional payday loans, including high fees, short repayment periods, and inadequate attention to the ability to repay,” Comptroller of the Currency Thomas Curry said in a statement. “These products can trap customers in a cycle of high-cost debt.”
The only thing surprising here is that ALL lenders of ANY financial product aren’t required to “analyze whether…borrowers can afford such loans”. Why not?!
8) Even if the big banks aren’t directly making the most predatory loans, they’re typically providing the financing to the slimiest companies, as the article by Gretchen Morgenson notes:
The question that the complaint doesn’t answer is this: Who is willing to provide the capital that enables Cash Call to finance what regulators say are predatory loans?
When asked if the office was investigating who was financing the company, Damien LaVera, a spokesman for the New York attorney general, declined to comment. He said the investigation was continuing.
I’ve found a preliminary answer. Documents from a 2007 lawsuit show who was providing financing assistance to Cash Call in previous years. The institutions included Deutsche Bank Securities and a unit of Citigroup, known as the CIGPF 1 Corporation.
9) Lest anyone think the government extorted/railroaded/shook down JPM, read this cover story in the WSJ:
Government officials say their case was built on documents detailing loans so weak they likely didn’t even qualify as subprime mortgages, and a cooperating former employee who warned her bosses the bank was vastly overstating the quality of the loans being securitized and sold in the run-up to the financial crisis. Investigators turned up documents detailing mortgages with overstated income, inflated appraisals and skewed loan-to-value ratios—which J.P. Morgan then packaged into pools of loans and sold to investors, Benjamin Wagner, U.S. attorney for Sacramento, said in an interview with The Wall Street Journal.
“We’re not blaming J.P. Morgan for the financial collapse, but it’s also appropriate for people to look at the conduct we were looking at here and to understand that it was this type of conduct that helped a housing crisis become a global financial crisis,” Mr. Wagner said.
The following narrative of how the settlement was crafted is based on interviews with people involved in the investigation and negotiations.
And then watch this hilarious riff by Jon Stewart: www.huffingtonpost.com/2013/10/24/jon-stewart-cnbc-jpmorgan-chase_n_4155786.html
10) It’s good to see that the scrutiny JPM is under is leading it to stop doing business with the underclass of financial predators (I’ll believe it when I see it though):
J.P. Morgan Chase JPM +1.53% & Co. is looking to scale back lending to pawn shops, payday lenders, check cashers and certain car dealerships as it seeks to tighten controls in a period of heightened regulatory scrutiny, said people close to the situation.
The bank has launched an internal review of its commercial-lending clients that is expected to result in the elimination of relationships with companies that pose a greater risk of fraud or money laundering and are viewed as risky to J.P. Morgan’s reputation, these people said.
The process could slice hundreds of millions of dollars from the bank’s annual revenue, one of these people said. J.P. Morgan already has culled some clients and is likely to exit from more relationships, another person said. It isn’t yet known which companies have been cut off.
The effort is part of a push by the nation’s largest bank by assets to improve its oversight in the wake of regulatory pressure to fix a number of problems.
The commercial-banking review is one of many internal initiatives approved by J.P. Morgan Chase Chairman and Chief Executive James Dimon designed to root out risk and compliance problems. It isn’t known if regulators played any role in urging J.P. Morgan to examine its relationships with pawn shops, payday lenders and others.
11) Speaking of Jon Stewart, he “Goes After A Peculiar Blackstone Deal And Rips Financial Media For Not Covering It”: http://www.businessinsider.com/daily-show-rips-apart-blackstone-2013-12
In October, Bloomberg’s Stephanie Ruhle, Mary Childs, and Julie Miecamp reported that private equity firm Blackstone structured a strange financial maneuver to pay a company to force it to miss a debt payment, thereby triggering a credit default swap to the tune of $15.6 million.
One way to describe this is is, dang, that’s brilliant (and legal). Jon Stewart, famed financial skeptic, had a different take on the Daily Show last night.
“Now I’m sure you’re asking yourself, ‘Hey, I think I saw something like that in Goodfellas, when they get insurance on a restaurant and then deliberately blow the restaurant up,” Stewart says. “But in Goodfellas, it was illegal. In the financial world, it’s above board.”
Later in the segment, correspondent Samantha Bee interviews a reporter at the New York Times, skewering the paper for failing to cover the story. She also meets with members of the BuzzFeed business team to spice up an otherwise dry CDS story with some Nicolas Cage GIFs.
12) What a travesty that three states are protecting bad financial actors:
In the years I was assigned to Treasury’s Financial Crimes Enforcement Network, or Fincen, I observed many formal requests for assistance having to do with companies associated with Delaware, Nevada or Wyoming. These states have a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies — or by companies lacking information on their “beneficial owners,” the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered.
Our State and Treasury Departments routinely identify countries that are havens for financial crimes. But, whether because of shortsightedness or hypocrisy, we overlook the financial crimes that are abetted in our own country by lax state laws. While the problem is concentrated in Delaware, there has been a “race to the bottom” by other states that have enacted corporate secrecy laws to try to attract incorporation fees.
13) Doctors are getting into the action too! This type of arrangement is rife with conflicts and should simply be banned. Doctors should not be in the business of facilitating financing of their own bills.
In dentists’ and doctors’ offices, hearing aid centers and pain clinics, American health care is forging a lucrative alliance with American finance. A growing number of health care professionals are urging patients to pay for treatment not covered by their insurance plans with credit cards and lines of credit that can be arranged quickly in the provider’s office. The cards and loans, which were first marketed about a decade ago for cosmetic surgery and other elective procedures, are now proliferating among older Americans, who often face large out-of-pocket expenses for basic care that is not covered by Medicare or private insurance.
The American Medical Association and the American Dental Association have no formal policy on the cards, but some practitioners refuse to use them, saying they threaten to exploit the traditional relationship between provider and patient. Doctors, dentists and others have a financial incentive to recommend the financing because it encourages patients to opt for procedures and products that they might otherwise forgo because they are not covered by insurance. It also ensures that providers are paid upfront — a fact that financial services companies promote in marketing material to providers.
…A review by The New York Times of dozens of customer contracts for medical cards and lines of credit, as well as of hundreds of court filings in connection with civil lawsuits brought by state authorities and others, shows how perilous such financial arrangements can be for patients — and how advantageous they can be for health care providers.
Many of these cards initially charge no interest for a promotional period, typically six to 18 months, an attractive feature for people worried about whether they can afford care. But if the debt is not paid in full when that time is up, costly rates — usually 25 to 30 percent — kick in, the review by The Times found. If payments are late, patients face additional fees and, in most cases, their rates increase automatically. The higher rates are often retroactive, meaning that they are applied to patients’ original balances, rather than to the amount they still owe.
For patients, the financial consequences can be dire.
14) This NYT editorial is spot on:
Patients around the nation are being victimized by medical credit cards that can lead to financial calamity. These cards, issued by specialty finance companies as well as commercial banks, carry exorbitant interest rates after an initial period of zero interest expires — with heavy penalties for late payments. They are often pushed on patients with modest incomes by health care providers who want to make sure that they get paid, even if some of their patients end up with huge credit card bills they can’t afford. Unless strong regulatory action is taken to curb the abuses, financial companies will continue to gouge consumers at their most vulnerable moments, when they are in pain and need medical attention.
Doctors and dentists whose offices arrange for these credit cards say these kinds of loans help patients pay for the care and procedures they need. But it’s hard to imagine a situation in which a consumer is more susceptible to financial coercion by a provider with a conflict of interest.
