Fact of the Day

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1. Reis says:

   January 22, 2009 at 2:22 pm

   Federal usury law limiting the amount of interest anyone can charge.

   The excuse for high interest rates is credit risk. The instutions charging very high amounts (I’ve seen payday loan contracts specifying 364% per annum, not to mention late charges and fees), attempt to justify these rates as necessary to compensate for the high rate of defaults.

   Basically that means these predatory practices such as rent-to-own and payday loans are lending money to people they shouldn’t be lending money to. Kind of like, wait, exactly like sub-prime mortgages.

   A federal usuary ceiling would stop high risk lending, and slow down predatory lending practices.

2. anon says:

   January 22, 2009 at 2:31 pm

   Federal usury law limiting the amount of interest anyone can charge.

   Over Joe Biden’s dead body, I’m sure.

   The excuse for high interest rates is credit risk.

   Now you are onto something. Rather than usury limits, I would like to see a requirement that the risk data used to justify higher rates be open to public audit (same thing for auto and health insurance). I don’t think it would survive. After TARP, the excuse that this is private business data can be simply laughed off.

3. Reis says:

   January 22, 2009 at 2:41 pm

   I think the public audit requirement for proving risk data is a weak argument. Credit scores are public, and the individual can object to false debt claims used on his/her credit score.

   I think the biggest impact to get the public behind this is exposure of predatory loan contracts that can immeasureably increase the burden to the debtor after the contract is executed, and also the terms of contracts that are blantantly outrageous, such as the percent-per-day payday loans. These guys embarass Mafia loan sharks.

4. anon says:

   January 22, 2009 at 2:48 pm

   the individual can object to false debt claims used on his/her credit score.

   True… but I am saying that the individual should be able to examine and object to the algorithm that says their credit score justifies a higher rate. I think they are all bogus (at the low end of risk), but I don’t know because I can’t examine them. If it is justified, then the bank will have the data to prove it.

   I think the biggest impact to get the public behind this is exposure of predatory loan contracts

   Yes, now you are touching on something… I think we need a broad law reforming all consumer contracts. There are too many automatic clauses.

5. Unstable Isotope says:

   January 22, 2009 at 2:58 pm

   So, are you saying Adam Smith was a socialist? [/snark] Ayn Rand must be rolling over in her grave right now.

   I think we need to return some power to the consumer, no more one way contracts. I also think they should reform the credit scoring process. Right now, the burden is on the consumer when a mistake is made in the report even when the consumer didn’t make the mistake. The burden needs to be on the scoring agency. That would make identity theft less devastating and maybe would lead to some caution in the issuance of credit.

6. xstryker says:

   January 22, 2009 at 3:28 pm

   Talking about high interest rates is missing the point completely, not that I’m suggesting interest rates should be regulated.

   The underlying causes of our current problem, regulation-wise, is firstly that banks were allowed to deceive investors by selling subprime investments off-balance-sheet that were rated “Safe”. And secondly, that investment banks were allowed to evade the capital requirements that bind retail banks and insurance companies when they wildly overleverged themselves with credit default swaps – in other words, they weren’t holding enough capital to cover the payouts. Retail banks have to hold enough capital to survive a certain percentage of their customers withdrawing all their money. Insurance companies have to hold enough capital to survive paying out a certain percentage of their policies at once.

   In short – banks should not be allowed to deceive their customers, and should be required to take enough precautions to remain solvent.

7. xstryker says:

   January 22, 2009 at 3:31 pm

   Talking about high interest rates is missing the point completely, not that I’m suggesting interest rates should be regulated.

   I meant to say, “not that I’m suggesting interest rates shouldn’t be regulated.” Many states already have such laws on the books.

8. Reis says:

   January 22, 2009 at 3:37 pm

   xstryker, the laws enforcing capital/surplus ratios have been on the books twice as long as you’ve been alive. These laws simply weren’t enforced during the last eight years, despite audits by federal regulators showing that the harm that occurred was imminent.

9. xstryker says:

   January 22, 2009 at 4:15 pm

   Reis, the reason they weren’t enforced is because Credit Default Swaps are largely unregulated – they are not subject to the kind of regulations governing the solvency of insurance, securities or futures. The megabanks issuing these swaps are subject to capital ratios as part of their other businesses, and enforcement of those is certainly part of the problem.

   In plain language, selling credit default swaps is like selling insurance as if it were an investment (naked CDS), and then not subjecting the practice to the rules governing either.

10. Unstable Isotope says:

    January 22, 2009 at 4:19 pm

    CDS were unregulated and didn’t one of the Gramm bills allow them to be possible?

11. xstryker says:

    January 22, 2009 at 4:47 pm

    Yes, Gramm-Leach-Bliley created them, and Gramm’s Commodity Futures Modernization Act explicitly prevented the SEC from regulating them (as well as creating the Enron Loophole).

    (3) The Commission is prohibited from–

    (A) promulgating, interpreting, or enforcing rules; or

    (B) issuing orders of general applicability;

    under this title in a manner that imposes or specifies reporting or recordkeeping requirements, procedures, or standards as prophylactic measures against fraud, manipulation, or insider trading with respect to any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act).

12. xstryker says:

    January 22, 2009 at 4:51 pm

    http://blawgletter.typepad.com/bbarnett/the_contingent_lawyer/

13. Brian Shields says:

    January 22, 2009 at 8:20 pm

    People who are dumb enough to go to a payday loan place aren’t smart enough to realize that they’re getting screwed or else they wouldn’t have done it in the first place.

    I had a coworker who went to one, and got tied up in their borrow/repay cycles. He would go in the week between paydays, borrow $250, and pay back $450 on payday.

    I’m all about paying debts on time, but if it comes down to those terms, the bastards can wait a week for their money.

14. Unstable Isotope says:

    January 22, 2009 at 8:30 pm

    Brian,

    People go to payday loan places because they are shut out of the regular banking system. The regular banking system punishes poor people (like charging monthly fees for checking accounts), so they go outside of it.