As Georgians mark the 10th anniversary of the U.S. financial crisis, the worst downturn since the Great Depression, measures put in place to protect consumers and members of the armed forces face growing threat of rollback.
Powerful forces are at work to overturn a number of consumer protections and big money has been pouring into campaign coffers.
Congress is considering legislation to let some lenders skirt Georgia’s heralded ban, dating to 2004, on short-term loans linked to a borrower’s payday. And the Trump administration may soon weaken enforcement of the Military Lending Act, designed to protect service members and the families from debt traps.
The Consumer Financial Protection Bureau was created in 2010, two years after the September 2008 financial crisis. It put in place safeguards against mortgages going to people who couldn’t afford to pay them back.
After a series of hearings in 2015, the bureau proposed a new rule that would force so-called non-bank lenders to play by similar rules as those governing banks. Specifically these unconventional lenders would have to put in place a metric to ensure a borrower’s ability to repay.
That new rule was supposed to take effect this year, but a coalition of payday lenders, installment loan providers and title-pawn companies has brought suit trying to block it. The Trump administration, as part of its promise to roll back regulation, has sided with the companies and signaled it is open to providing waivers to them should the rule take effect.
Title-pawn companies would be affected by the change. They are uniquely clustered in Georgia, where they enjoy little state or federal oversight. These companies promise quick cash without credit checks, and borrowers get cash in exchange for handing over the title to their car.
Borrowers effectively buy back the title by paying back what they’ve borrowed — under contracts that do not use the word loan but charge steep lending rates allowed to go as high as an annual rate of 187.5 percent.
Some cash-strapped Georgians who have resorted to the title-pawn outlets believe safeguards are needed.
For more than 26 years, Ronald Laster was the on-again off-again guitar player for James Brown until the legendary singer died in 2006. After decades on the road, Laster settled down, and in 2014 bought a house in the Atlanta area. Then he suffered an injury and needed cash to pay his bills.
By the time he was done paying off to Georgia Auto Pawn — owned by Community Loans of America — the roughly $2,500 he said he borrowed against his 2007 Cadillac CST, Laster said he’d paid more than $6,200 to get back a clean title to the car.
“I’m thinking I’m doing good — I’m paying it on time. Then seven payments later, the bill is the same,” he recalled in an interview.
At the direction of advocacy groups, Laster filed a complaint with Consumer Financial Protection Bureau, and wonders how this sort of lending is still legal.
“We went through hell. It’s like if I borrow $5 from you and you want $100 back,” he said.
Several state government agencies in Georgia warn about the dangers of title-pawn lending and also caution consumers that they do not regulate the sector, which includes brand names such as TitleMax, TitleBucks, Complete Cash and Georgia Auto Pawn.
Indications are the rules could be watered down in other ways. A Consumer Financial Protection Bureau internal document showed it plans to stop auditing compliance by lenders with the Military Lending Act, the New York Times reported in mid-August. The bureau would still look into any formal complaints, but its auditors wouldn’t do so as a preventive step designed to ensure companies are complying.
Macon-area bankruptcy attorney Clifford Carlson believes that will lead to more litigation as lawyers, not the government, bring cases against firms that have violated the Military Lending Act.
“It’s like shooting fish in a barrel,” said Carlson, referring to non-bank lenders as “bottom feeders” who already thrive because of the lack of oversight. “I am going to make a lot more money, because they think they can do whatever they want. They’re going to have a federal jury telling them what they have to do.”
The Military Lending Act had bipartisan support in 2006 when it became law after being signed by Republican President George W. Bush. It was expanded through regulations by the Defense Department in 2016 and today the law caps interest and fees on loans to active-duty service members at 36 percent. It applies to installment loans, payday loans and tax refund anticipation loans.
Because title-pawn loans carry annual interest rates far higher than the 36 percent cap, they effectively can’t be marketed to members of the military.
As part of the Trump administration’s promise to roll back regulation, Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau, renamed it the Bureau of Consumer Financial Protection. The seemingly subtle name change — which critics said was an attempt to de-emphasize the idea of protecting consumers— was accompanied by a revamped mission statement that included getting rid of burdensome regulations. Mulvaney has expressed a desire to phase out the bureau.
“It is amazing how short memories are. The prevailing sentiment in Washington now is that regulations are too burdensome, and that our biggest problem is that there are too many rules to protect consumers,” said Lauren Saunders, associate director of the National Consumer Law Center.
For consumer advocates, it suggested focus has shifted from protecting the working poor to smoothing the path for non-bank lenders.
Why oppose efforts to require a measure of a borrower’s ability to repay? None of the leading title-pawn companies approached for comment, nor their trade associations and their lobbyist, were willing to talk about this.
But the rating agency Moody’s Investors Service provided an explanation in a June 6, 2018, note to investors announcing it had upgraded the credit rating of TMX Finance LLC, TitleMax’s parent company.
TMX recently refinanced a large swath of its corporate debt, giving it time to adjust to market and regulatory changes, the note said in explaining the upgrade.
The proposed federal rule change requiring that customers have the wherewithal to repay the debt “[brought] into question whether TMX will be able to retain its historical portfolio size should the rule become effective,” Moody’s cautioned.
However, that is the rule that the Trump administration may be preparing to water down.
Title-pawn companies have been hurt by one market factor — the growing availability of car loans that stretch over longer periods, even for customers with shaky credit. The longer-term loans, noted Moody’s, reduce the pool of potential title-pawn customers because a car loan must be paid off before the title can collateralize a new debt.
Congress is also now weighing bills that could weaken state-imposed interest rate caps.
Two bills would enshrine in law so-called rent-a-bank practices. These involve circumventing state caps by having a federally chartered bank partner with non-bank lenders. The practice was common in the early 2000s until regulators cracked down.
One bill — the Modernizing Credit Opportunities Act — would make it so that banks can effectively lend their charter to third parties that generate loans with interest rates above state caps.
More than 100 consumer and civil rights organizations sent a letter of opposition on May 21 to members of the House Committee on Financial Services, which has yet to vote on the bill. The groups called on committee members to resist any effort to “undercut the historic power of the states to protect people from dangerous, usurious loans.”
A similar weakening of state rules is envisioned in the Protecting Consumers’ Access to Credit Act of 2017. The bill’s summary said it seeks to validate bank loans “regardless of whether a bank has subsequently sold or assigned the loan to a third party.”
That bill passed the U.S. House on a party-line vote last February but has not been taken up in the Senate. Its sponsor, North Carolina Republican Rep. Patrick McHenry, and the bill’s lone co-sponsor, New York Democratic Rep. Greg Meeks, have each received more than $150,000 in contributions connected to payday lending since 2005 and 1998 respectively, according to a database run by the Center for Responsive Politics.
Non-bank lenders have Washington muscle in their camp. They’ve been represented in recent years by Timothy Rupli, a powerful lobbyist who was paid more than $360,000 in the current 2017-2018 election cycle by the Alliance for Capital Access and the same amount by the Independent Community Bankers Association. A 2016 tax filing for the non-profit alliance shows it paid Rupli, a protege of former Republican House Majority Leader Tom Delay of Texas, $825,000 for “advocacy and education” that year. He did not return calls for comment.
The so-called fringe banking industry, and particularly payday and title-pawn lenders, spreads money around to members of both parties. In the current election cycle, these companies have given through late August more than $391,000 to members of the House Financial Services Committee and more than $2 million to committee members since 1989, according to open-source data on the website Opensecrets.org.
Rep. David Scott, an Atlanta-area Democrat and committee member, has received nearly $100,000 from non-bank lenders over his 15-year tenure.
“It is important for the people of our nation to know that there are currently over 50 million unbanked or underbanked people in America, many of whom are in my district,” Scott said by email. “Non-bank financial institutions play an important role in providing access to financial services for these customers that traditional banks do not currently serve, allowing them to access capital and establish a credit history.”
Georgia is one of just 11 states that have elected insurance commissioners, which regulate some small-dollar lending. Title-pawn firms might fall under the jurisdiction of the insurance commissioner if Georgia moves to regulate the sector. Ralph Hudgens, the current commissioner, has received almost $125,000 from non-bank lenders since 2011, including just over $55,000 from the top three title-pawn firms. Predecessor John Oxendine took in $160,600 from these lenders from 1995 to 2011, $72,800 of it from the top three title-pawn firms.
The high-cost lending sector also has friends on Wall Street.
New York giant Fortress Investment Group in 2010 took a stake in Springleaf Finance Corp., which specialized in loans to troubled borrowers. In 2015, Springleaf then took a large stake in OneMain Financial, putting them both under the corporate umbrella of OneMain Holdings Inc. Fortress sold that stake this January for $1.4 billion to Apollo Global Management LLC and Varde Partners.
Private equity behemoth Blackstone Group in 2013 bought into Lendmark Financial Services, which provides installment loans from $500 to $15,000 across the Southeast.
The advocacy group Americans for Financial Reform issued a report last December identifying at least 23 private equity firms with big stakes in payday and non-bank lenders.
Ordinary Americans are invested in these same lenders in surprising ways.
Regulatory filings by fund managers with the Securities and Exchange Commission show, for example, that the JPMorgan Trust I fund holds short-term debt issued by TMX Finance LLC, the parent of TitleMax.
Similarly, investment manager Legg Mason, which offers investment funds to individual and institutional investors, reported on April 30 that it owned about $600,000 worth of TMX corporate securities., held through its Western Asset Income Fund.
Some boutique Wall Street firms with ownership stakes in these lenders also now package the loans into complex securities that are sold to investors who get a share of the earnings stream. This sort of bundling of loans is what happened with poorer quality mortgages in the run-up to the housing-led financial crisis in 2008.
Laura Corley of The Macon Telegraph contributed to this article