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Op-Ed: A Playbook for Small-Dollar Credit
American Banker (02/27/14) Tescher, Jennifer and Brockland, Jennifer

Despite regulatory pressure on small-dollar credit products, consumers’ need for small-dollar loans is not going away, write two Center for Financial Services Innovation (CFSI) executives in this opinion article.  A CFSI study found that subprime consumers spent an estimated $41.2 billion on small dollar credit in 2012 and 15 million consumers used payday, pawn, auto title, nonbank installment or deposit advance loans. A third may spend more than they make, and for this group, credit can have a negative impact.

However, for the 66 percent for whom credit is a reasonable option, “high-quality loan products that meet their needs are hard to come by.” Regulatory uncertainty and reputational risk are challenges for lenders. CFSI convened 50 lenders, consumer advocates, alternative data providers and nonprofits to create a handbook.

Three key concepts emerged from the guide. First, it’s not all about price. While price is used as part of the equation when determining the quality of a loan, it is just part of the puzzle. One could argue that structure is actually a larger issue. It is critical to move beyond talking about artificial annual percentage rates. Second, ability to repay is absolutely paramount. Determining the ability to repay can be difficult, especially for small-loan amounts, but the borrower must have confidence in the lender’s ability to do so before extending credit. Finally, no one-size-fits-all solution exists; people need credit for vastly different reasons and so the credit available must adapt.

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AFSA Comments on TCPA Petition

On Feb. 21, AFSA submitted a letter to the Federal Communications Commission (FCC) on the Telephone Consumer Protection Act (TCPA). AFSA’s letter supported a petition filed by the Retail Industry Leaders Association (RILA) requesting that the FCC clarify that the TCPA rules that became effective on Oct. 16, 2013, do not apply to isolated, immediate, one-time responses to consumer-initiated requests for text offers. These “on demand texts” are only sent as a one-time response to a consumer-initiated text request. For example, consumers may see a call to action display, such as “text ‘lease’ to 12-345 for a special offer.” If interested, consumer’s text the word “lease” to the number provided. Consumers then receive a near-instant text response containing the desired offer.
AFSA agreed with RILA that the FCC could not have intended for the new written consent rules that became effective Oct. 16, 2013, to apply to consumer-initiated on demand texts because these texts are: (1) proactively initiated by the consumer, not a telemarketer, (2) isolated, one-time-only messages sent immediately in response to a consumer’s specific request, and (3) contain only the specific information requested by the consumer. Clarification by the FCC is necessary given the increasing number of frivolous and costly TCPA class action lawsuits.

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Inside the Beltway
U.S. Sues College Chain ITT over Loans
USA Today (02/26/14) Horovitz, Bruce

On Feb. 26, the Consumer Financial Protection Bureau (CFPB) announced that it was suing for-profit college ITT Educational Services, alleging that the company participated in predatory lending practices. "We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default,” said CFPB Director Richard Cordray. Today's action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics."

This is the first time the CFPB has taken enforcement action in the for-profit education industry. The company responded to the allegations by saying that they believe the CFPB’s charges have “no merit” and that they would “vigorously defend” themselves against the charges. ITT’s tuition is among the highest in the country, according to the CFPB; a bachelor’s degree can cost as much as $88,000.

The complaint against ITT alleges that the company offered a zero-interest loan that had to be repaid at the end of the first academic year with full knowledge that the students could not repay the loan. Additionally, the bureau alleges that the company pushed students into high-cost private student loans to cover the difference. The complaint alleges that ITT projected a 64 percent default rate on its students’ loans.

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Identity Theft Leads Top Consumer Complaints in U.S. FTC
Reuters (02/27/14)

U.S. consumers reported losing $1.6 billion to identity theft in 2013, as the problem led the list of the Federal Trade Commission’s (FTC) top consumer complaints. Just over 290,000 of the 2 million people that contacted the FTC reported incidents of identity theft. Second on the list with nearly 205,000 complaints was debt collection. Banks, lenders and payday loans had the third most complaints, followed by imposter scams and complaints about telephone and mobile services.

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U.S. Regulator Calls for Free Credit Scores
Wall Street Journal (02/27/14) Zibel, Alan

Consumer Financial Protection Bureau (CFPB) director Richard Cordray, in a speech on Feb. 27, called on major banks to provide consumers with their credit scores. Consumers are already entitled to receive their credit scores once per year from the each of the three major credit bureaus. Cordray sent a letter to major banks on Feb. 10 addressing the issue. “I strongly encourage you to make the credit scores on which you rely available to your customers regularly and freely, along with educational content to help them make use of this information,” the letter stated. “Customers who monitor and manage their credit standing may be less likely to become delinquent or to default.”

Cordray noted that the bureau has received more than 30,000 complaints about credit reporting, three-quarters of which contained inaccurate information.

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National and State News
Banks Take Interest in College Lending
The Wall Street Journal (02/24/14) Andriotis, Annamaria

Private student loan companies are continuing to loosen the market for borrowers, as they try to build ties with younger borrowers. Because of the increase in lending, companies, which are encouraged by continually falling default rates, are able to offer students much lower interest rates than some government loans or meet the shortfall between federal loans and the rising cost of attending school. According to a recent study, $6.9 billion in loans were issued by the seven largest private lenders in 2013.

As the job market continues to improve, students are more likely to take out loans to attend school, knowing they can get work to pay back the loan upon graduation. As financial institutions search for revenue, student loans offer a gateway that they can use to attract potential lifelong customers. Rates vary widely; those with excellent credit can command as low as two percent on variable rate loans and as low as 5.5 percent on fixed-rate loans. People with lower credit scores face rates in the ten percent range. However, the $1.2 trillion student loan market remains dominated by federal student loans. Just 13.9 percent of total outstanding student loans are private.

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Bill Would Legalize Payday Lending in PA, Labeled Predatory by Critics
TribLIVE (02/22/14) Oravecz, John D.

Payday lending is currently illegal in Pennsylvania, but a bill under consideration by the state legislature could change that. The Pennsylvania anti-payday law that was passed in 2010 capped interest rates on loans at 24 percent.

The bill comes at a time when lenders are circumventing the state law by lending to Pennsylvanians over the internet. Supporters of the bill argue that the bill would legalize payday loans, thus allowing the state to oversee the marketplace. “I believe there is a need for a properly structured, short-term lending in Pennsylvania,” said Rep. Chris Ross (R-Kennett Square), who sponsored bills to legalize and regulate loans that passed the state House in 2012 and 2004, but did not pass the Senate. “We've got the Internet, for which there is no effective means of regulation to protect consumers.”

The latest bill was passed by the Senate Banking and Insurance Committee in June by an 8-6 vote.

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European Parliament Committee Agrees on Payment Card Interchange Fee Caps
Out-Law.com (02/21/14)

A committee in the European Parliament (EP) reached consensus on a regulation that would impose caps on the interchange fees charged for processing debit and credit cards. The EP’s Economic and Monetary Affairs Committee approved a plan that would cap fees for credit purchases at 0.3 percent of the value of the transaction and cap debit transaction fees at 0.2 percent or €0.07 cents, whichever is lower. The fees would apply across borders, uniformly and to transactions made domestically. Members of the committee were quick to point out that the caps were maximums and European nations are free to offer lower caps.

The full EP is set to vote on the proposal at an upcoming session. If approved, the plan would go into effect one year after passage.

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Groups Seek Foreclosure Moratorium
The Baltimore Sun (02/24/14) Wheeler, Timothy B.

Civil rights groups, including the NAACP and Casa de Maryland, are pressing state lawmakers in Maryland to impose a six-month foreclosure moratorium, as Governor Martin O’Malley and his administration make the case that there are plenty of resources available for struggling homeowners. According to RealtyTrac, Maryland had the highest foreclosure rate in the country last month.

Legislation that would place a moratorium will be heard in a House Committee on March 5. The state enacted a moratorium in 2012 in order to enact foreclosure reforms statewide, resulting in a backlog. According to Maryland Bankers Association president and CEO Kathleen Murphy, previous reforms more than doubled the time for a mortgage lender to take action against a seriously delinquent borrower from 217 days before the recession to 575 days presently, making it one of the longest processes in any state in the country. Marylanders collectively received $1.3 billion of assistance from both the federal and state government and nearly 95,000 have reached out for help through a state hotline.

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Missouri Lawmakers Considering Changes to Payday Loans
The News-Leader (02/22/14) Shapiro, Jordan

Legislation currently under consideration in the Missouri legislature would permit higher fees and interest on loans, but would give borrowers more time to pay, as well as prohibit a borrower from rolling over a payday loan. The measure would permit borrowers up to 120 days to pay off a payday loan without additional fees.

The Senate passed the measure 20-13. Several Senators felt that the legislation did not go far enough, citing the legislation’s removal of a 75 percent interest and fee cap.

The legislation’s outcome could drastically affect a 2014 ballot measure to cap the annual interest rate for payday loans at 36 percent. The Missourians for Responsible Lending ballot initiative has been approved for circulation, but the group has not started collecting signatures.

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New Home Loan Balances Overtake Foreclosures: Equifax
American Banker (02/27/14) Dymi, Amilda

First-time homebuyers and move-up buyers have, for the first time in three years, eclipsed loans in foreclosure, according to a new report from Equifax. The total balance of home finance writeoffs in 2013 dropped to $149.7 billion, which represents a six-year low. After several years of shedding debt, Americans seem more willing to take on new responsibilities. First mortgage balances increased 2.5 percent to $7.9 trillion and home equity balances fell more than six percent to $622.3 billion. Card loans outstanding reached 315 million, which is the highest since October 2009, and new accounts topped out at 39.6 million.

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February 27, 2014

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AFSA Newsbriefs

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AFSA's mission is to protect and improve the consumer credit business, maintain a positive public image, and create a legislative climate in which reasonable credit regulation can and will be enacted. The association operates in the public interest, encourages and maintains ethical business practices, supports financial education for consumers of all ages, and provides other assistance in related fields on an as-needed basis.

The American Financial Services Association has provided services to its members for over ninety years. The association's officers, board, and staff are dedicated to continuing this impressive legacy of commitment through the addition of new members and programs, and increasing the quality of existing services.