Predatory Lending

Common Scams that Target Veterans

By: Charlotte Burgess 

Unfortunately, Veterans are often targets for a wide variety of scams. Being able to identify a potential scam is vital in protecting oneself from a wide variety of risks including identity theft, loss of assets or income, or even the loss of a home. Below are three of the common scams that often target Veterans as well as the possible risks and damages involved.

Pension Advance Scam

With this scam, the Veteran is asked to exchange his or her monthly pension for a one-time lump sum of money. Interest rates on this lump sum can be extremely high, even over one hundred percent. Furthermore, the exchange may end up being less than the amount the veteran’s pension would have added up to over the years. This advance also requires strict budgeting so that the Veteran doesn’t run out of money. In an emergency situation this advancement may seem like the only option, but it is beneficial to discuss other alternatives with a financial advisor or research other potential options before making a decision.

VA pension is a benefit that many Veterans depend on for monthly income. However, when a Veteran gets in a bind, the car breaks down or the air conditioner breaks, for example, this scam can seem extremely attractive. Considering how a pension advance will affect future income is a must before committing to the advance.

Phishing Scam

Like many phone call scams, the main goal of this scam is to retrieve personal information. Here, the scammer calls the Veteran and states that he or she works for the VA and needs to update the Veteran’s information within the VA’s system. Then, the scammer asks the Veteran for sensitive personal information such as social security numbers or banking information. From there, the scammer can use that information to commit identity theft or drain the Veteran’s bank accounts. The VA will never ask for a Veteran’s personal information over the phone. If someone calls acting as the VA and asks for this kind of information please report the incident to the VA.

Phishing scams have been going on for quite some time. For Veterans of a younger generation, like Millennials, this scam may be easy to catch as the younger generation is accustomed to technology and the frequency of these types of calls. However, for older Veterans, such as Vietnam Veterans, this may not seem like a scam at all. Widespread education on the subject enables those that understand to realize the importance of teaching others while also hopefully reaching those that may not understand.

Mortgage Scam

Most likely the most notorious scams aimed at veterans are those involving mortgages. These scams can promise special deals such as extremely low interest rates or “no-payment” reverse mortgages to veterans. These advertisements can be very misleading as the fine print may dramatically increase interest rates after a short period of time. Likewise, a no-payment reverse mortgage still requires the homeowner to pay taxes and insurance on the property, and if these amounts are not paid, the homeowner is considered to be in default, risking a loss of the home. Many of these scammers often use logos that look very similar to those used by the VA in their logos. However, the VA does not advertise the loans they offer. It is vital to seek outside advice before entering into one of these mortgages.

As technology advances more and more scams are going to present themselves. It is unfortunate that many of these scams target those that have sacrificed for and served our country. Seeking further education on new scams and seeking advice on investment opportunities or loan options and always refraining from giving out personal advice over the phone is the best way to combat scams and the risks that they impose.

Below are links to website’s discussing common scams that Veterans run into:

Scam Alert: Top Five Veteran Swindles

Scams that Target Veterans

 

Chalk One Up For Consumers!

By: Amy

Chalk one up for consumers! The California Supreme Court unanimously held that interest rates may render a consumer loan unconscionable even in the absence of a statutory interest rate cap. http://www.courts.ca.gov/opinions/documents/S241434.PDF. The ruling has also been covered in the LA Times and the American Banker.  This allows courts to take into account the facts and equities of each case, and not simply rely on a statutory rate.  The Court and the Amicus Brief filed by the consumer advocacy organizations cited Embracing Unconscionability’s Safety Net Function, 58 ALA. L. REV. 73-117 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1270836) in understanding the contract doctrine of unconsionability’s historical roots in courts of equity.

CFPB Rules

By: Amy 

The CFPB is finally issuing its arbitration rule! I have not yet fully read the rule, but the substance seems to say the same as the proposed rule. It doesn’t make arbitration clauses unenforceable, just the use of arbitration clauses to preclude class actions.  Essentially, the press release read in part:

 

“Today’s rule prohibits banks and other consumer financial companies from including mandatory arbitration clauses that block group lawsuits in any new contracts after the compliance date. The rule does not bar arbitration clauses outright. For these new contracts, however, these clauses have to say explicitly that they cannot be used to stop consumers from banding together to pursue relief as a group. The rule includes the specific language that financial companies must use. By restoring the ability of consumers to file or join group lawsuits, the rule gives companies more incentive to comply with the law. And the deterrent effect of such cases can more broadly influence the business practices of other companies as well.

Our new rule also requires companies to submit their claims, awards, and other information about the arbitration of individual disputes to the Bureau. This will help us better monitor arbitrations to make sure the process is fair for individual consumers. The companies are required to scrub these materials of personal information, and starting in July 2019, we will also post them on our website. This will promote transparency and give consumers, providers, and other regulators more insight into how arbitration works. “

 

We do not know where this will lead but it is a new step in arbitration law.  Also, I again caution that the full rule is at:  http://files.consumerfinance.gov/f/documents/201707_cfpb_Arbitration-Agreements-Rule.pdf.

 

Rules Prohibiting Schools’ Use of Mandatory Arbitration Agreements

By: Amy

On October 28, the Department of Education issued final regulations intended to protect student loan borrowers against school closures and fraud.  To that end, the rules include significant provisions restricting school arbitration agreements; clarifying student rights to raise school fraud as a defense to loan repayment; providing automatic closed school loan discharges to certain eligible borrowers; and providing new rights for students to obtain false certification loan discharges.  See https://www.gpo.gov/fdsys/pkg/FR-2016-11-01/pdf/2016-25448.pdf.  Although some provisions are likely to face legal challenge, the rules generally will be effective July 1, 2017.

For those in the dispute resolution community, the  provisions that may be of most interest are those limiting school arbitration and class-waiver requirements.  This came in the wake of some institutions, such as Corinthian Colleges, using class action waivers and arbitration clauses to thwart actions by students for fraudulent and abusive conduct that largely pushed students into financial peril.  The new rules prohibit schools participating in the federal student loan program from entering into pre-dispute arbitration agreements with students or agreements that purport to waive students’ rights to bring class actions.  These limitations apply to agreements with students who have obtained Federal Direct Loans or benefited from Direct Parent PLUS Loans, and apply to claims regarding the making of the Federal Direct Loan or the provision of educational services for which the loan was obtained.  This bars schools from using contract clauses or stand-alone pre-dispute agreements with students that waive students’ right to go to court or to pursue a class action over any claims that could also give rise to a “borrower defense” claim (described more fully in the new rules).  The provisions also bar a school from relying on an existing pre-dispute arbitration agreement or other agreement to force an individual or class action out of court.  This includes agreements entered into prior to the rule’s effective date.  The school must either amend the agreement or notify the students that they will not enforce the agreement.

The rules also aim to increase transparency regarding such “borrower defense” related arbitration and litigation.  If schools do engage in arbitration proceedings in a manner that is consistent with the regulations and applicable law, the rules require that these schools notify the Secretary of Education and provide disclosures.  The rules similarly require that schools disclose such judicial filings and dispositions.

The complete provisions are lengthy, and can be reviewed in the PDF linked above from 75926 Federal Register/Vol. 81, No. 211/Tuesday, November 1, 2016/Rules and Regulations.

Meanwhile, we wait for the Consumer Financial Protection Bureau (CFPB) to issue final regulations regarding its proposal to prohibit companies from including pre-dispute arbitration clauses in agreements regarding financial products or services that prevent class action lawsuits. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it. Although the proposal would allow companies to include arbitration clauses in their contracts, it would require that the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court.

A Basic Guide to Understanding Missouri Payday Loans for the Missouri Consumer

 

In 2003, Elliot Clark took out five short-term loans of $500 from payday lenders in Kansas City so he could keep up with the bills his security job simply could not cover. Clark juggled the five loans for five years, paying off a $500 loan and interest using loans he took from another payday lender. Clark ultimately received disability payments from Veterans Affairs and Social Security, and he was able to repay the debt. The interest Clark paid on the original $2500: more than $50,000.

Clark is not alone. Twelve million American adults use payday loans annually. In Missouri, borrowers received 1.87 million payday loans between October 2013 and September 2014. The average loan in Missouri during this time period was $309.64, with an interest/fee of $53.67 for a 14-day loan. The resulting average interest rate was approximately 452%.

So, how do we as Missouri consumers navigate the world of payday loans and short-term lending? This post answers: (1) how does Missouri define payday loans and (2) what traps should I avoid as a consumer of such loans?

What is a payday loan?

A payday loan is an unsecured small dollar, short-term loan. The name of the loan derives from the loan period; the typical duration of a payday loan matches the borrower’s payment schedule. In Missouri, a borrower can obtain a loan for up to $500. An initial interest rate can be set for up to 75%. The loan must be repaid 14 to 31 daysafter the borrower receives the loan.

A borrower may “renew,” or rollover the loan for an additional 14 to 31 days. To renew a loan, a borrower must:

  • Make a written request to the lender
  • Pay 5% of the principal amount of the loan
  • Make a payment on interest and fees due at the time of renewal

The lender can also charge up to 75% in interest rate for each renewal. A borrower in Missouri can renew the loan up to 6 times.

What traps should I, the consumer, avoid?

  • Do not underestimate the extremely high interest rate: A lender can charge an interest rate of 75% on the initial loan. During each renewal period, that interest rate stays the same. As mentioned above, the average annual percentage rate for a payday loan in Missouri is 452%, and with high annual percentage rates reaching 800%.
  • Do not take the full amount offered: Payday lenders will frequently attempt to persuade consumers to take the full $500 loan, when a borrower only needs a fraction of that amount. Take only the amount you need to cover the immediate expenses. The extra $100 you borrow can become over $1000 that you must pay back.
  • Do not be embarrassed to ask for help in understanding the contract terms: Loan language can be confusing, especially as special terms used in loan contracts are not used in everyday language. If you do not understand what annual percentage rate, renewal, or principal are, ask the employee. Make the employee explain exactly how the loan will work – go through how much you will owe at the end of the term, how much money will be owed if renew the loan, and how much interest will be paid on each loan. It is better to understand what you contract into before you sign then to be surprised in two weeks with a larger debt than you expected.
  • Do not renew a payday loan: Lenders make money by collecting on interest on renewal loans. Because Missouri allows interest rates up to 75% per renewal, your interest owed will quickly become larger than the amount you originally took out. As mentioned earlier, only take out the amount you need and can afford to pay back!
  • Do not take out loans from multiple locations: While it is tempting to take out a second loan from a second lender to pay the interest off a second loan, this leads to further debt. While law does not allow this type of lending, it still occurs in Missouri payday loan practice. Like Clark, borrowers become stuck juggling multiple loans and increasing interest.

Alarmingly, the Missouri laws regulating payday loans are confusing and unclear. More terrifying is the lack of guidance Missouri consumers face in navigating the maze of payday statutes. The Missouri Attorney General’s office currently does not produce a guide to short-term loans (like it does in other areas of law, such as Landlord/Tenant). The Missouri Department of Finance provides an explanation as murky and bewildering as the statute it attempts to interpret.

Ultimately, Missouri consumers must be extremely careful when taking out payday loans. The best policy individual consumers regarding payday loans may be to simply avoid at all costs.

**I would like to recognize Michael Carney, staff attorney at Mid-Missouri Legal Services, for his help in researching and understanding the Missouri statutes applicable to payday loans.

Reverse Mortgage Scams: How to Protect Yourself

By: Greg Garcia

As more American’s move into retirement, more and more people are taking advantage of a reverse mortgage to access the equity in their home. However, this also means that scams involving reverse mortgages are on the rise. These scams can take many forms, including:

  • Contractor Fraud: This scam involves someone convincing you that you need home improvements or repairs that you can pay for by letting them help you take out a reverse mortgage.
  • Flipping Fraud: This type of reverse mortgage fraud involves convincing someone to use a reverse mortgage to move into a smaller, less expensive home. Often these homes have been made to look nice but are actually of very poor quality.
  • Theft: This is the most simple reverse mortgage scam but also the most destructive. In this scam, a trusted advisor or relative convinces someone to take out a reverse mortgage in order to pay off their existing mortgage but instead simply walks away with the funds.

For more information on types of reverse mortgage scams see http://www.investopedia.com/articles/personal-finance/071715/beware-these-reverse-mortgage-scams.asp

Fortunately, there are some simple steps you can take to protect yourself if you are considering a reverse mortgage. First, it is good to know a little bit about how reverse mortgages work. Reverse Mortgage are actually called Home Equity Conversion Mortgages (HECMs) and are insured by the Federal Housing Authority. In order to qualify for an HECM, a borrower must meet the following qualifications:

  • 62 years of age or older
  • Occupy their property as a primary residence
  • Own (at least mostly) their property

Any product that doesn’t meet the above criteria is something you should be skeptical of. Also, there is an excellent network of advisers across the country who specialize in assisting people who are interested in a reverse mortgage. These counselors are generally FHA housing specialists who can offer their services to you for free or at a very low cost and can help you determine if a reverse mortgage is right for you. In addition, these counselors can help you make sure that the product you are looking at is a legitimate HECM. The U.S. Department of Housing and Urban Development maintains a database of HECM counselors across the country that you can use to find help in your area. This database can be found at: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmlist

Just like any other financial product, you should never feel rushed in entering into a reverse mortgage. Get help from the network of HUD advisers and help your community by reporting any suspicious reverse mortgage activity to HUD at 1-800-347-3735.

Potential Cost of a Payday Loan in Colorado

By: Edison

Payday loans can be difficult to understand, and the costs associated with them can be incredibly burdensome.  Prior to obtaining a payday loan, you should try to understand as much as possible about what you are actually going to be on the hook for.  Here is an example of what potential costs could look like in Colorado:

There are three allowable costs in Colorado
• Finance Charges
• Interest Charges
• Maintenance Charges

Using the maximum loan amount of $500 and the minimum term of 6 months, potential costs could look like this:

1. Finance Charges can equal up to 20% of the first $300 and an additional 7.5% of the remaining $200. These are automatically earned on the date of the transaction.
 $300 x 20% = $60
 $200 x 7.5% = $15
This gives us $75 in finance charges

2. Interest Charges may also be charged at 45% per year for each loan; the charge is only applicable to the amount borrowed, and not any additional fees.
 $500 x 45% = $225
 $225 / 2 = $112.50 [if compounded annually]
This gives us $112.50 in interest charges.

3. Maintenance Charges of $7.50 per $100 borrowed is also allowed and only charged after the first month.
 $7.50 x 5 = $37.50
 There is a limit of $30/month
 $30 x 5 = $150
 These charges do not start until the second month
This gives us $150 in maintenance charges

The maximum cost allowable under Colorado law breaks down as follows:
 $75 – Initial finance charges
 $112.50 – Interest charges
 $150 – Maintenance charges

This gives a total cost of $337.50 for borrowing $500 for six months!!
This amounts to roughly 630%!!

This means that in order to borrow $500, you will ultimately need to pay back $837.50.  This is exactly why it is so important to know what you are on the hook for.  The high cost can drive you into a cycle of needing a payday loan in order to pay off your previous payday loan.

Payday Lending FAQ

By: Edison

What is a payday loan?

  • Short-term loan designed to meet immediate needs
  • Generally three features
    • Small amounts
    • —Typically due your next payday
    • You must give lenders access to your checking account or write a check for the full balance in advance that the lender can deposit when the loan comes due.

How much does a payday loan cost?

  • —A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%.
  • See my previous blog post for an example based upon Colorado law.

Are payday loans more expensive than credit cards?

  • Yes, typical credit card APRs are between 12% – 30%.  Furthermore, credit cards can be paid back over the course of time whereas payday loans are typically due all at once.

What does it mean to roll over or renew a payday loan?

  • Usually this means that you pay a fee to delay payback of the loan.  This is in addition to the original loan fees.  Sometimes these renewals will place the original fees into the principal of the new loan.  This allows fees to be charged on the new, higher loan amount.  Many states limit or ban roll overs.  You can find more information on each states roll over policy in the resources listed below.

Do online payday lenders need to follow state regulations?

  • Yes, online payday lenders must follow the regulations of the state of residence of the borrower.

Are there special regulations for Military borrowers?

Do I need to get a credit check for a payday loan?

  • No, payday lenders typically do not check the three major credit bureaus to make their determination.  Some lenders use alternative credit reporting services to determine creditworthiness.

What are some alternative solutions to payday loans?

  • —Borrow from a credit union or other small loan lender. Be sure you understand all the fees and terms before you sign.
  • Put off the expense until you have the money. For example, if you need money to repair your car, find other transportation until you have the funds to fix the car.
  • —Request overtime or secure a part-time job to cover the unexpected expense.
  • Contact your creditor and ask for more time to pay or a repayment plan.
  • —Use your credit card or obtain one if you do not currently have one. Even if you have to get a cash advance, it will be much less expensive than a payday loan.

Where can I get more information?

  • —Consumer Federation of America – Payday Loans—Great resources on state specific regulations—www.paydayloaninfo.org 
  • —Consumer Financial Protection Bureau—Government agency that provides information and complaint service for consumers—www.consumerfinance.gov 
  • —National Consumer Law Center—Nonprofit agency focusing on consumer rights issues—http://www.nclc.org

 

Payday Lenders in Disguise

By: Charles Clark 

This blog has periodically covered the dangers of payday loans. Payday loans charge extremely high interest rates and often leave borrowers deep in debt. Sources show that the average consumer who takes on a payday loan is in debt for over 6 months, is charged an annual interest rate of over 400%, and has to extend the original payday loan 9 times. There is almost never a situation in which a consumer in need should turn to a payday lender for fast cash.

There are a number of alternative options when consumers need cash or need to pay down existing debt. Those alternatives include setting up a payment plan with creditors, salary advances, credit counseling, credit union loans, emergency assistance programs, and — as a last resort — credit card cash advances. As this blog has shown, taking out a payday loan will almost always leave consumers in deeper debt than before taking out the loan.

There are many individuals and organizations trying to educate consumers on the danger of payday loans, and deter consumers from taking on payday loan debt. Many state governments, including Colorado, have passed laws that limit the interest rate payday lenders can charge. These laws are an attempt to protect consumers from predatory financial products. While the Colorado law has helped consumers to some extent, the industry continues to grow and 77% of Coloradans still live within 5 miles of a payday lender.

Many states have recognized the problem with payday loans and are addressing the issue through laws and regulations. However, some of these payday lenders have adapted their business model in an attempt to make sure they don’t have to comply with the law. The new business models create a type of payday lender in disguise – they essentially function like a payday lender and offer extremely high interest rates without having to comply with payday loan laws. The following are a few examples of loans to be careful of:

  • Auto title loans: Also known as a car title loan, this is a loan where the borrowers car is used as collateral. This means that if the borrower does not make loan payments on time then the lender can repossess the borrowers car and sell it in order to repay the borrowers debt. Similar to payday lenders, auto title lenders often charge extremely high rates of interest to borrowers.
  • Tribal affiliated loans: Due to the increase in regulation many payday lenders have started partnering with Indian tribes in order to offer payday loans over the Internet. By partnering with Indian tribes many of these lenders do not have to comply with US law. Partnering with Indian tribes is a way for these payday lenders to keep taking advantage of consumers by charging excessive interest rates.
  • Mobile Home Loans: Recently, reports have uncovered unfair lending practices by mobile home manufacturers. Such reports have found that loan terms have included high interest rates, undisclosed fees, and terms that would make selling or refinancing the home impossible. As always, before financing the purchase of a mobile home consumers should talk to financial professionals they trust and not just the sellers of the mobile home.