Fake Debt Collection Scam Alert

The Federal Trade Commission has received permission from US Federal Court to shut down a debt collection scam that the FTC alleges “collected phantom payday loan “debts” that consumers did not owe. Consumers received millions of collection calls from India, and that since January 2010 the operation took in more than $5 million from victims, according to the FTC.”

The FTC has a webpage dedicated to helping consumers figure out if the calls they are receiving are in fact a scam.  Please go to the FTC’s website and become educated on this issue.

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Consider the Consequences

A letter recently published by Christopher Donegan in the Kansas City Star outlined what could happen to his area if steep rate caps to short-term lenders become law and drive them out of business:

“If Missourians cannot qualify for a traditional loan and do not have the option of taking out a non-existent alternative loan, consider the consequences. Landlords, utility companies, assistance agencies and churches will all feel the economic effects.”

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WSJ: Payday fees reasonable compared to credit-card & bounced check fees

Today’s Wall Street Journal had a great Editorial that outlined how misguided government targeting of the payday loan industry is when it serves so many Americans.

Some excerpts:

“Payday lenders charge around $15 for a two-week $100 loan to their typically high-risk borrowers, which equates to a 390% annual interest rate. Consumer groups like the liberal Center for Responsible Lending call this “predatory,” but the terms are reasonable compared to an average credit-card fee, which can exceed 900%, or a bounced check fee, which can top 1,500%.”

The column also illustrated the important point on what happens when payday lenders are regulated out of business:

“A clutch of Internet lenders base their businesses offshore or on Indian reservations to evade state regulators, and that’s where many abuses occur. By contrast, large, publicly traded companies belong to industry associations and don’t want to court bad publicity with bad practices. Advance America, one of the largest lenders, had about 100 complaints filed with state regulators in 2011—out of more than 10 million transactions.”

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Non-Profit Director: Short-term loans offer needed help

A terrific Op-Ed printed in our neighbor state Missouri was written by Gerri Guzman who is Executive Director of the Consumer Rights Coalition, a non-profit, consumer based organization. In the Op-Ed, published by the Columbia Daily Tribune, Guzman writes of how a 36% cap would “would eliminate access to many forms of consumer credit at a time when it is becoming increasingly difficult to get a traditional bank loan.”

It continues: “Left without access to credit in today’s weak economy, what options will be left for Columbia consumers if they are unable to make ends meet between paychecks? They can bounce a check, overdraw their bank account, not pay bills on time or, worse, turn to an illegal loan shark or unregulated offshore lender — all more costly and credit-damaging options.”

Guzman urges citizens to consider the consumer side of the story. She cites the stories of: “Kathleen from Carl Junction, a mother of six who recently went through some tough financial times, says: “A short-term loan is what kept my utilities on.” LaWesha, a single mother of three from St. Louis who uses payday loans to keep her household bills and rent paid on time without paying late fees, says: “Without the payday loan option, my rent and bills would fall behind, and it would cause a hardship in my household.”

Guzman also makes a point about how short term, small dollar loans can be superior to other credit options: “Consumers choose short-term loans because they usually are the most cost-effective and least credit-damaging option available. Research shows the vast majority of short-term loan borrowers use the loans moderately and wisely as a short-term solution that enables them to avoid the more costly and punitive options of bouncing checks and incurring penalties for late bill payments. In fact, most borrowers repay the loans on time with no additional charges or fees.”

She also brings up important data about states that have capped payday loans at 36%: “We only need to look at other states with short-term credit bans, such as Georgia and North Carolina, to predict what will happen in Missouri. There, lending bans led to increases in bounced checks, personal bankruptcy filings and complaints about creditors and debt collectors. In states where consumers don’t have access to short-term loans, households pay an average of $200 more in overdraft protection and bounced-check fees than in states where short-term loans are available.”

It’s a great read and again, the whole Op-Ed can be found here.

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Avoid this Telephone Payday Loan Scam

WIFR-TV in Illinois picked up on this growing telephone payday loan scam where someone repeatably calls a residence threatening legal action if the person doesn’t pay off a payday loan they didn’t take out in the first place.  From the news story:

 

“Schermerhorn knew it was a scam, since she never took out a payday loan. The Better Business Bureau Director Dennis Horton says it’s just one of many types of scams going on right now.

“There’s an uptick in the number and again it has a lot to do with the economy and the fact that their are a number of people out there that are behind on their bills and maybe sent to collection, and they are preying on their fears that they will be jailed for that… which is not going to happen,” Horton said.

The BBB says if we have not taken out a pay day loans and we get a phone call, the easiest thing to do is just hang up.”

 

 

 

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Why a payday loan costs the amount it does

The Payday Pundit blog has a good catch with this excerpt from an article in The Atlantic magazine by Megan McArdle:

“Credit unions are not charities.  They have responsibilities to the members who deposit money with them: they cannot make loans that are reasonably likely to lose money (at least in aggregate).  And while the interest rates on products like payday loans are indeed eye-popping, the companies themselves are not especially profitable.  This suggests that the reason the loans are so expensive is that they cost a lot to make.

 

Why is this?  For starters, because the risk of default is very high.  It’s hard to get good numbers, and estimates vary widely, but I’m pretty sure that they’re well north of 10%.  That’s a pretty high default rate for any type of loan, but particularly one where the term is measured in weeks.

 

That’s not the only reason to think that these loans are expensive.  Since they are often for very small amounts, they have high transaction costs relative to the loan amount–it takes just as much time to process forms for a $200 loan as it does for a $10,000 loan.

 

There’s also the structure of the loan, which involves a lot of intensive interaction with the borrower.  Remember, the short term (and the fact that they’re tied to payday) helps hold down the default costs on payday loans.  It’s also really expensive to achieve; it means maintaining a storefront with people in it at all hours.

 

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2012 Legislative Session Info

The Senators are due back in Lincoln next week.  They will convene on Wednesday, Jan. 4th to begin the next Legislative Session.  The legislative calendar for this year’s activity can be found here.

Another good link to have once session starts is the home page for the Nebraska Legislature.  Once session starts, bill information will be updated on that page.

 

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