If you’re looking to borrow, you may already know about payday loans—they’re fast, dangerous, and designed to take advantage of those in need. (Think of them as the jackal of the lending animal kingdom.) Is there a better option? Something just as fast, but… you know, not evil?
You bet there is.
When it comes to lending, consider the personal installment loan the noble lion, king of the lending jungle.
Payday loans are short-term, unsecured loans that target the financially vulnerable—the low income, the elderly, and those without limited financial education. Payday lenders won’t perform a credit check and, depending on the restrictions in your state, they may not even check your income first.
Fast money without a credit check? What could be wrong?
Well, a lot. Payday loans charge unfair fees and massive interest rates, meaning they have extraordinarily high annual percentage rates (APR)—the measurement that allows you to see the full cost of loans.
Certified financial educator Maggie Germano (@MaggieGermano) says, “Payday loans usually turn out very negatively for the borrower. Interest rates and fees are sky-high and many people are unable to pay them back in time. Every time you miss your payment due date, the amount owed increases significantly. This makes it impossible for people living paycheck to paycheck to pay them off. This can destroy a borrower’s credit and wipe out their bank account.”
It may be tempting to try out the fast, risky option with the short payment terms, but don’t forget: it’s a trap.
When it comes to payment terms, installment loans are the exact opposite of payday loans. Instead of having to make a massive payment in a short amount of time, installment loans offer you the chance to make regular, smaller payments over a much longer period of time.
Most installment loans will offer you a MUCH lower APR on your loan than a dangerous payday loan and also—unlike many payday loans—they won’t charge a sneaky prepayment penalty.
What’s a prepayment penalty? Law professor David Reiss (@REFinBlog) sums it up well: “Prepayment penalties come into play if the borrower repays all or part of a loan before the payment schedule that the borrower and lender had agreed upon when the loan was first made. In theory, they compensate the lender for the costs of making the loan in the first place and any decrease in interest payments that the lender would get as a result of early repayment. In practice, prepayment penalties can be a new profit center for lenders if the fees are set higher than the amounts actually lost by prepayment.”
When Carolyn Smith saw a for sale sign go up on her block one evening in the fall of 2011, it felt serendipitous. The now 68-year-old was anxiously looking for a new place to live. The landlord of her four-unit apartment building in the city’s Austin neighborhood was in foreclosure and had stopped paying the water bill. That month, she and the other tenants had finally scraped together the money themselves to prevent a shutoff and were planning to withhold rent until the landlord paid them back. Exhausted with this process and tired of dealing with “slumlords,” Smith wanted to buy a home in the neighborhood to ensure that she, her mother, Gwendolyn, and their dog, Sugar Baby, would have a stable place to live. But due to a past bankruptcy, Smith thought she would never be able to get a mortgage. So when she saw a house on her street for sale with a sign that said “owner financing,” she was excited. The next morning, she called the number listed and learned that the down payment was just $900—a sum she could fathom paying. “I figured I was blessed,” she says.
Her good fortune continued. A man on the other end of the line told her she was the very first one to inquire. The seller, South Carolina-based National Asset Advisors, called her several more times and mailed her paperwork to sign. Smith says she never met in person with anyone from National Asset Advisors or Harbour Portfolio Advisors, the Texas-based company that owned the home. But she says the agents she spoke with assured her that her credit was good enough for the transaction, despite the past bankruptcy. Next, they gave her a key code that allowed her to go in and look at the house, explaining that she’d be purchasing it “as is.” Smith thought the two-flat looked like a fixer-upper—the door had been damaged in an apparent break-in, and there was no hot-water heater, furnace, or kitchen sink—but given her poor luck with apartments of late, she felt she couldn’t pass up the chance to own a home. Both she and her mother, now 84, had been renting their whole lives; after pulling together the down payment, they beamed with pride when, in December 2011, they received a letter from National Asset Advisors that read “Congratulations on your purchase of your new home!”
But within a year, Smith discovered that the house was in even worse shape than she’d realized. In her first months in her new home, Smith estimates that she spent more than $4,000 just to get the heat and running water working properly, drinking bottled water in the meantime. Then the chimney started to crumble. Smith would hear the periodic thud of stray bricks tumbling into the alleyway as she sat in her living room or lay in bed at night; she began to worry that a passerby would be hit in the head and soon spent another $2,000 to replace the chimney. Public records show that the house had sat vacant earlier that year, and the city had ordered its previous owners to make extensive repairs.
Had Smith approached a bank for a mortgage, she likely would’ve received a Federal Housing Administration-issued form advising her to get a home inspection before buying. But as far as she recalls, no one she spoke to ever suggested one, and in her rush to get out of her old apartment, she didn’t think to insist.
The documents Smith signed with Harbour and National Asset Advisors required her to bring the property into habitable condition within four months, and with all the unexpected expenses, she soon fell behind on her monthly payments of $545.
Smith’s retirement from her job as an adult educator at Malcolm X College, in the spring of 2013, compounded the financial strain. Living on a fixed income of what she estimates was around $1,100 a month in pension and social security payments, she fell further behind, and the stress mounted.
“When we got to be two months behind, they would call me every day,” she remembers.
National Asset Advisors also began sending her letters threatening to evict her. That’s when Smith had a heart-stopping realization: She hadn’t actually purchased her home at all. The document she had signed wasn’t a traditional mortgage, as she had believed, but a “contract for deed”—a type of seller-financed transaction under which buyers lack any equity in the property until they’ve paid for it in full. Since Smith didn’t actually have a deed to the house, or any of the rights typically afforded home owners, she and her mother could be thrown out without a foreclosure process, forfeiting the thousands of dollars they’d already spent to rehabilitate the home.
“I know people always say ‘buyer beware’ ” she acknowledges. “But I’d never had a mortgage before, and I feel like they took advantage of that.”
What felt like a private nightmare for Smith has been playing out nationwide in the wake of the housing market crash, as investment firms step in to fill a void left by banks, now focused on lending to wealthier borrowers with spotless credit histories. In a tight credit market, companies like Harbour, which has purchased roughly 7,000 homes nationwide since 2010, including at least 42 in Cook County, purport to offer another shot at home ownership for those who can’t get mortgages. Such practices are increasingly common in struggling cities hard hit by the housing crash. A February 2016 article in the New York Times titled “Market for Fixer-Uppers Traps Low-Income Buyers” examined Harbour’s contract-for-deed sales in Akron, Ohio, and Battle Creek, Michigan. The Detroit News has reported that in 2015 the number of homes sold through contract-for-deed agreements in the city exceeded those sold through traditional mortgages.
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Contract-for-deed sales also offered an attractive loophole from the growing set of regulations on traditional mortgages following the financial crisis. “In the same way that you saw [subprime lenders like] Countrywide get really big in the late 1990s,” says David Reiss, research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School, “one of the real attractions for the businesses operating in this space is that they are underregulated.”
Last week I asked 100 people in an audience, “How many of you have heard of the U.S. Consumer Financial Protection Bureau?”
Only five people raised their hands.
I’m surprised. In the 240-year history of our nation, we never had a truly pro-consumer federal agency until five years ago. It’s working, but now we’re in danger of losing it.
If you use money or credit, take out loans, buy cars or pay on a mortgage, this bureau in Washington, D.C. is changing the way financial companies do business with you.
We might lose the bureau because big and small banks and other financial institutions hate it. They’re fighting it in court with lawsuits and with campaign contributions to members of Congress who will decide.
We might lose it because an area congressman, Rep. Jeb Hensarling, R-Dallas, is closer to achieving his goal of watering down the nation’s financial regulatory system — nicknamed Dodd-Frank.
Hensarling leads the House committee that gives thumbs up or down to financial bills. With that power in hand, he received more campaign donations from banks, insurance companies and the securities and investment industry than any other member of Congress, the nonpartisan Center for Responsive Politics says.
And we might lose the bureau because we have a president who, unlike the previous president, will not veto Hensarling’s pro-Wall Street bill – The Financial Choice Act — that would rip Dodd-Frank apart.
Remember that Dodd-Frank and the bureau came about after the 2008 financial meltdown. The bureau is part of the master plan to make sure it never happens again.
Accomplishments
If you haven’t heard of the U.S. Consumer Financial Protection Bureau, I’ll take part of the blame. Maybe The Watchdog hasn’t placed a big enough spotlight on it.
It was the bureau that revealed how Wells Fargo employees created two million fraudulent customer accounts. The bureau fined Wells Fargo $100 million.
The bureau worked to get $120 million in refunds for military families by policing improper practices with mortgages, credit cards, student loans and other financial products aimed at the military.
The bureau created rules that prevented lenders from approving risky home mortgage loans and charging hidden fees to home buyers.
The bureau forced credit card issuers to pay hundreds of millions of dollars back to consumers because of illegal practices, unfair billing and deceptive marketing.
The bureau went after crooked bill collectors, check cashers and credit repair services.
The bureau forced the three major credit bureaus to make it easier to submit corrections to inaccurate information on your credit report.
In sum, the scoreboard shows the bureau’s big number at $12 billion. That’s how much the bureau claims it has refunded to consumers or zeroed out when their invalid debts were canceled.
No wonder Wall Street, its golden boy Hensarling and the corps of dark-suited lobbyists want this darn thing rubbed out. Quickly.
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Back to Bad Loans?
One who has studied government regulation tells me that financial institutions have adapted to the new order. The rules tamed the craziness that led to financial ruin nine years ago, says David Reiss, a professor at Brooklyn Law School.
Eliminating the bureau would force “a return to the dark old days when lenders could get away” with shadowy marketing practices, Reiss says.
“If the Trump administration were to get rid of the Consumer Financial Protection Bureau, consumers would have to be far more cautious when dealing with lenders,” he says. “There definitely would be a return to some of the predatory and abusive behavior. No one would be looking over the lender’s shoulder.”
Consumers are often told to stay away from predatory lenders, but the problem with that advice is a predatory lender doesn’t advertise itself as such.
Fortunately, if you’re on guard, you should be able to spot the signs that will let you know a loan is bad news. If you’re afraid you’re about to sign your life away on a dotted line, watch for these clues first.
You’re being offered credit, even though your credit score and history are terrible. This is probably the biggest red flag there is, according to John Breyault, the vice president for public policy, telecommunications and fraud at the National Consumers League, a private nonprofit advocacy group in the District of Columbia.
“A lender is in business because they think they’re going to get paid back,” Breyault says. “So if they aren’t checking to see if you have the ability to pay them back, by doing a credit check, then they’re planning on getting their bank through a different way, like offering a high fee for the loan and setting it up in a way that locks you into a cycle of debt that is very difficult to get out of.”
But, of course, as big of a clue as this is to stay away, it can be hard to listen to your inner voice of reason. After all, if nowhere else will give you a loan, you may decide to work with the predatory lender anyway. That’s why many industry experts feel that even if a bad loan is transparent about how bad it is, it probably shouldn’t exist. After all, only consumers who are desperate for cash are likely to take a gamble that they can pay back a loan with 200 percent interest – and get through it unscathed.
Your loan has an insanely high interest rate. Most states have usury laws preventing interest rates from going into that 200 APR territory, but the laws are generally weak, industry experts say, and lenders get around them all the time. So you can’t assume an interest rate that seems really high is considered normal or even within the parameters of the law. After all, attorney generals successfully sue payday loan services and other lending companies fairly frequently. For instance, in January of this year, it was announced that after the District of Columbia attorney general sued the lending company CashCall, they settled for millions of dollars. According to media reports, CashCall was accused of offering loans with interest rates around 300 percent annually.
The lender is making promises that seem too good to be true. If you’re asking questions and getting answers that are making you sigh with relief, that could be a problem.
Nobody’s suggesting you be a cynic and assume everybody’s out to get you, but you should scrutinize your paperwork, says David Reiss, a professor of law at Brooklyn Law School in New York.
“Often predators will make all sorts of oral promises, but when it comes time to sign on the dotted line, their documents don’t match the promises,” Reiss says.
And if they aren’t in sync, assume the documentation is correct. Do not go with what the lender told you.
“Courts will, in all likelihood, hold you to the promises you made in the signed documents, and your testimony about oral promises probably won’t hold that much water,” Reiss says. ” Read what you are signing and make sure it matches up with your understanding of the transaction.”
On a chilly December afternoon in Atlanta, a judge told Reiton Allen that he had seven days to leave his house or the marshals would kick his belongings to the curb. In the packed courtroom, the truck driver, his beard flecked with gray, stood up, cast his eyes downward and clutched his black baseball cap.
The 44-year-old father of two had rented a single-family house from a company called HavenBrook Homes, which is controlled by one of the world’s biggest money managers, Pacific Investment Management Co. Here in Fulton County, Georgia, such large institutional investors are up to twice as likely to file eviction notices as smaller owners, according to a new Atlanta Federal Reserve study.
“I’ve never been displaced like this,” said Allen, who said he fell behind because of unexpected childcare expenses as his rent rose above $900 a month. “I need to go home and regroup.”
Hedge funds, large investment firms and private equity companies helped the U.S. housing market recover after the crash in 2008 by turning empty foreclosures from Atlanta to Las Vegas into occupied rentals.
Now among America’s biggest landlords, some of these companies are leaving tenants like Allen in the cold. In a business long dominated by mom-and-pop landlords, large-scale investors are shifting collections conversations from front stoops to call centers and courtrooms as they try to maximize profits.
“My hope was that these private equity firms would provide a new kind of rental housing for people who couldn’t — or didn’t want to — buy during the housing recovery,” said Elora Raymond, the report’s lead author. “Instead, it seems like they’re contributing to housing instability in Atlanta, and possibly other places.”
American Homes 4 Rent, one of the nation’s largest operators, and HavenBrook filed eviction notices at a quarter of its houses, compared with an average 15 percent for all single-family home landlords, according to Ben Miller, a Georgia State University professor and co-author of the report. HavenBrook — owned by Allianz SE’s Newport Beach, California-based Pimco — and American Homes 4 Rent, based in Agoura Hills, California, declined to comment.
Colony Starwood Homes initiated proceedings on a third of its properties, the most of any large real estate firm. Tom Barrack, chairman of U.S. President-elect Donald Trump’s inauguration committee, and the company he founded, Colony Capital, are the largest shareholders of Colony Starwood, which declined to comment.
Diane Tomb, executive director of the National Rental Home Council, which represents institutional landlords, said her members offer flexible payment plans to residents who fall behind. The cost of eviction makes it “the last option,” Tomb said. The Fed examined notices, rather than completed evictions, which are rarer, she said.
“We’re in the business to house families — and no one wants to see people displaced,” Tomb said.
According to a report last year from the Harvard Joint Center for Housing Studies, a record 21.3 million renters spent more than a third of their income on housing costs in 2014, while 11.4 million spent more than half. With credit tightening, the homeownership rate has fallen close to a 51-year low.
In January 2012, then-Federal Reserve Chairman Ben Bernanke encouraged investors to use their cash to stabilize the housing market and rehabilitate the vacant single-family houses that damage neighborhoods and property values.
Now, the Atlanta Fed’s own research suggests that the eviction practices of big landlords may also be destabilizing. An eviction notice can ruin a family’s credit and make it more difficult to rent elsewhere or qualify for public assistance.
Collection Strategy?
In Atlanta, evictions are much easier on landlords. They are cheap: about $85 in court fees and another $20 to have the tenant ejected, according to Michael Lucas, a co-author of the report and deputy director of the Atlanta Volunteer Lawyers Foundation. With few of the tenant protections of places like New York, a family can find itself homeless in less than a month.
In interviews and court filings, renters and housing advocates said that some investment firms are impersonal and unresponsive, slow to make necessary repairs and quick to evict tenants who withhold rent because of complaints about maintenance. The researchers said some landlords use an eviction notice as a “routine rent-collection strategy.”
Aaron Kuney, HavenBrook’s former executive director of acquisitions, said the companies would rather keep their existing tenants as long as possible to avoid turnover costs.
But “they want to get them out quickly if they can’t pay,” said Kuney, now chief executive officer of Piedmont Asset Management, a private equity landlord in Atlanta. “Finding people these days to rent your homes is not a problem.”
Poor Neighborhoods
The Atlanta Fed research, based on 2015 court records, marks an early look at Wall Street’s role in evictions since investment firms snapped up hundreds of thousands of homes in hard-hit markets across the U.S.
Researchers found that evictions for all kinds of landlords are concentrated in poor, mostly black neighborhoods southwest of the city. But the study found that the big investors evicted at higher rates even after accounting for the demographics of the community where homes were situated.
Tomb, of the National Rental Home Council, said institutional investors at times buy large blocks of homes from other landlords and inherit tenants who can’t afford to pay rent. They also buy foreclosed homes whose occupants may refuse to sign leases or leave.
Those cases make the eviction rates appear higher than for smaller landlords, according to Tomb, whose group represents Colony Starwood, American Homes 4 Rent and Invitation Homes. The largest firms send notices at rates similar to apartment buildings, which house the majority of Atlanta renters.
Staying Home
Not all investment firms file evictions at higher rates. Invitation Homes, a unit of private equity giant Blackstone Group LP that is planning an initial public offering this year, sent notices on 14 percent of homes, about the same as smaller landlords, records show. In Fulton County, Invitation Homes works with residents to resolve 85 percent of cases, and less than 4 percent result in forced departures, according to spokeswoman Claire Parker.
The Fed research doesn’t say why many institutional investors evict at higher rates. It could be because their size enables them to negotiate less expensive legal rates and replace renters more quickly than mom-and-pop operators.
“Lots of small landlords, when they have good tenants who don’t cause trouble, they’ll work with someone who has lost a job or can’t pay for the short term,” said David Reiss, a Brooklyn Law School professor who specializes in residential real estate.
The most complained-about financial institutions aren’t banks or credit card companies. They’re credit reporting agencies — and by a wide margin.
In fact, the big three credit agencies topped the latest Consumer Financial Protection Bureau (CFPB) monthly report. Equifax attracted an average of 1,470 complaints during a three-month period from May to July. Experian took second place with 1,272 complaints, and TransUnion had 1,202 complaints. As a category, all of the credit reporting agencies are up by about 30 percent from the same period a year ago.
By comparison, the most complained about bank, Citibank, had only an average of 922 complaints during the same period.
So why all the gripes? To answer that question, you have to take a closer look at a society that’s heavily dependent on credit and at the companies that determine how much credit each member of society gets. But the answer also reveals a broken system and a few workarounds that could help you avoid becoming another statistic.
The CFPB did not respond to a request for a comment about its complaint data. Neither did two credit reporting agencies, Experian and TransUnion. Equifax deferred to the Consumer Data Industry Association (CDIA), the trade association for the credit reporting industry.
Decoding the numbers
A CDIA representative suggested the government’s complaint numbers are inflated because they fail to distinguish between complaints and “innocuous” disputes.
“For example, consumers who are reviewing their credit reports for the first time might question an item they don’t recognize or understand and then lodge a complaint,” says Bill Mashek, the CDIA spokesman. “A consumer might also lodge a complaint against one of the credit reporting agencies when their issue is actually with another entity such as a lender.”
The credit agencies also say the government fails to verify any of the complaints; it simply reports them. And it has no way of weeding out potential errors, such as when consumers question an item they don’t recognize or understand on their credit report.
Consumers have a different perspective. They’re people like Peter Hoagland, a consultant from Warrenton, Va., whose homeowner insurance bill rose unexpectedly this year. He hadn’t made any claims, but soon discovered the reason: His credit rating insurance score taken a hit. He contacted his credit reporting agency. ” I could find no one to give me a credible explanation,” he says.
Hoagland contacted his insurance company and explained the problem, but the company stuck with its rate increase anyway.
“It feels to me that insurance companies are using these ratings as contrived reasons to raise rates,” he says. “They can’t cite claims I have made or increased risk with my home. So they hide behind these dubious insurance score ratings as justification to raise rates.”
It’s complicated
David Reiss, a professor at Brooklyn Law School , says stories like Hoagland’s are common because credit scores affect almost everyone. They’re also difficult to explain.
“The credit reporting agencies have a big impact on whether someone can get a mortgage to buy a house as well as on setting the interest rate that they will ultimately pay,” he says. “At the same time, they often act in mysterious ways in terms of what they include and do not include on their reports.”
