How private equity firms make money offering loans to cash-strapped Americans
washingtonpost.com
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These loans should be strictly regulated. They are preying on people who may lack basic understanding of loans or a barely scraping by. These companies use very aggressive tactics when trying to recover the money + interest.
These loans are a cancer to a society. As it pushes people very close to an edge.
Subprime loans should be strictly regulated to (a) ensure the borrower understands what they're getting into ex ante and (b) minimize systemic effects.
But they're also a symptom of American poverty. There are people who, strictly speaking, are better off for having taken a subprime loan. (Classic example: truck they need for work breaks down and they have no rainy day fund.) Banning the loans won't fix the underlying problem.
Those three words seem to be doing a lot of work. How would you minimize systemic effects? What systemic effects even need to be minimized?
Subprime loans have higher default rates than prime loans. You want to make sure the lender can bear that risk. (Subprime mortgages getting into places they shouldn't have been was a proximate cause of the financial crisis.)
We have skyrocketing medical cost, high student debt, we are constantly seeing a pro business approach when it comes to laws/taxes, which does hurt the middle class.
Fortunately, poverty doesn't take national co-ordination to solve. Cities and states can do a lot to eliminate poverty within their borders.
I'm a New Yorker. If a South Dakota company markets a loan to me, they're in New York's jurisdiction.
The contract may specify Delaware law. But I think states can write consumer protections to override such clauses.
It's Dirty Money on Netflix episode 2 or 3.
What set me off about him is it wasn't just the loans, but he had in the fine print that if you did not login and click some button within thirty days of your loan automatically renewed. So people that paid it off really didn't because they never pushed the button.
Ton's of rich people suffer from delusional narcissism and the reason is most cheat to get there then delude themselves into thinking they are special.
https://planetsave.com/2013/12/23/a-rigged-game-of-monopoly-...
So they send out a check randomly: who is to verify that the recipient is the one who encashed it?
I think there's a law in the US that any item sent unsolicited can be considered a "gift" and you don't have to pay for it. Why doesn't that apply here?
In general, stories like this make me very sad. Motherfuckers like Geithner and Schwarzmann, etc. have all the money in the world they could ask for. Then why prey on poor people? Just enjoy your fucking dollars and leave these people alone!
This kind of despicable practice should be illegal.
"Some logged in on the bank website and committed identity theft electronically." "I see, did they take anything else?" "Uh, no." "Oh, good, so all the money's still there?" "What?" It's just my identity that's gone. None of your money?"
The banks, of course, figured out loopholes and with the CFPB out of commission, welcome to finance in America
Lo and behold, I get a Discover card in the mail a few weeks later.
So I called them up: I did not sign up, why did you send me the card? They insisted I had signed up. So I asked them to send me a copy of the application, with my signature on it (which they agreed to do).
And a few days later, I get a printed copy of, basically, a database record listing the automatically filled-in information. Nothing else.
How do you think they got that money in the first place?
It would be an interesting argument if said check were cashed without knowledge of any implicit contract (say another person opening+discarding the rest of the correspondence, or just simply someone who can't read well).
I'd imagine if you complained and really pushed after getting the first bill, they'd just void the arrangement upon your returning the money. If you couldn't pay it back immediately, there's a good argument to be made that you're entitled to a payment plan that is not their terms, but it's not like these scams are targeting people who have access to equal protection!
(I also have to wonder about a limited power of attorney with the ability to endorse checks, but not to form contracts)
https://about.usps.com/publications/pub300a/pub300a_tech_021...
EDIT: IANAL
I'm not sure why the author acting as if the negative externalities of subprime lending are all of the sudden new because PE firms are taking stakes in them. Are they "supercharged" because of mega PE funds? Probably, but I think the fact that these firms are so profitable (regardless of PE) is the bigger topic at hand.
Problem here is two-fold:
1. Why isn't the regulation that does exist working like it should?
2. Assuming you think these loans should just not exist - think again. First, it's obvious there is demand for this type of lending. Second, I would love for someone to tell me how for-profit entities in this space would avoid using dark patterns to get people to pay them back. There's usually a reason many entrepreneurs stay away from these business models - they are notoriously scummy for a reason.
This all reminds me of dark patterns technology managers implement to increase conversions (which IMHO is no different than what subprime lenders do). So for people who read this and think "oh this is so wrong"...is it ok for you to maximize profits using dark patterns (and thus extracting value to the wealth of your company) but not for a sub-prime lending?
For record - I'm not arguing one way or the other, just something for the HN crowd to ponder. For more details on this topic, great documentary on netflix: https://www.imdb.com/title/tt7909178/
Many of the "services" provided here are predatory rather than rehabilitative and it's entirely possible to have the latter without the former, ideally via something like a post office bank.
That the firms are profitable is secondary to whether it's a useful social good.
Predatory lending relies on an uninformed target.
The lender figures out how to translate that into APRs and possibly turn a profit, or perhaps there's no price that's profitable and socially good. That's perfectly fine.
Is this not an inversion of the risk associated with these loans? It was my understanding that riskier loans are assessed at higher rates of interest _because of_ the likelihood of default. Thus, extract as much as quickly as possible before the default.
How would companies profit if the successfully serviced loans did not offset the defaults, given these loans are not secured with another asset?
If it's possible, there's money to be made, and we live in the capitalist society I know exists in the US - how come you don't see it happening then? I would like to think if the market were truly that way then you would see it happening.
Eh, that is quite simple: if at any point a company has used a dark pattern, the loan in full is invalidated.
Now no company will dare to use a dark pattern.
Is the preference here that the guy didn't have the option of fixing his truck?
It would be nice if people weren't running so close to the edge that an emergency can ruin them. I don't know the particulars of this guy's story, there must be many people who are in this situation since this is such a profitable industry. Maybe that speaks to a larger issue of inequality in our society. I'm not sure that relying on predatory loans to be a safety net are the only or best option for society.
I come from a "payday-loan poor" family, and spent a good chunk of my adult life there myself. It's hard, but people with comfy salaries paternalistically taking options away because they know better really agitates me.
Absolutely, I just think it's a shame that there aren't alternatives available. Normally I'd assume that interest rates are that high because that's what is required to remain profitable while lending to the market, but I can't help wonder if consolidation and wall street ownership means there's a large profit margin and some gouging happening.
I don't want him to need the loan, but I respect him enough to trust him with the option. I'd prefer a competitive marketplace for his loans to shaming the concept of an alternative financial system, and I absolutely would not put it past capital to collude to keep the interest rates high.
I don't know that, though, since these are risky loans. Case in point, this very dude didn't pay it back.
High interest-rate loans are one thing. Forcing payment for the company's lawyer is another. Broad-spectrum mailing of loan offers with (what looks like) no assessment of ability to pay is quite another still.[1]
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[1] Or even worse, selecting for people who they know can't pay immediately, so they can rack up the margins/fees. That would be one of the typical definitions of "predatory."
There aren't obvious better options, once you strip the business down to its core of high-risk credit. It's a business that no matter how efficient is going to come with high interest rates.
The obviously predatory marketing practices need to be stopped. But the core of the business here is never going to be a nice one. :/
As others point out, payday loans and similar service a need. Payday loans in particular are the low-class version of it. The businesses go by different names higher up the class ladder.
He ended up loosing his job and could not make any of the payments. They lost their house, cars, and got divorced shortly after.
However, they are still in a different situation than the people that get sucked into those terrible high interest loans. He could literally get a new job as his educated and be back to making over $100k. A person that does not have any skills or education will have a much harder time trying to bounce back. As everything is more expensive when you are making minimum wage.
1: https://www.cnbc.com/2018/01/18/few-americans-have-enough-sa...
2: https://www.cnbc.com/amp/2018/05/22/fed-survey-40-percent-of...
As for societal conditions, almost everyone needs loans for something at some point, but taking out a small-time loan at a high interest rate is almost always a terrible option. Usually when there is a terrible option on the table with other less-terrible options, people don't choose the terrible one unless they really have to (or have absolutely no clue what they are doing). A rich person buying a BMW isn't going to take out a 300% loan on the car because they have other options and it's a literal waste of money for them. However, a poor person who's 1998 Toyota Camry broke down and needs to get the most bare-minimum used car to keep their only job has to suck it up and pay the 300% loan because they have no other options. By the time it's all said and done, the poor person paid a lot more relative to the cost of the item they bought even though the total amount may be less.
There are laws (or should be) protecting the layman. Examples: title companies check if a seller is mentally competent and understand what they are doing (encountered one case where the seller was selling his/her house significantly under market to a flipper, without an agent). Similar to that, and similar to how mortgages require thorough financial background checks and whole process of payments is rather dumbed down, it should probably be similar for this case.
More prosperity has to flow to people in the bottom tiers of our economy. America is regressing to a third world nation, first in small, limited areas, but spreading to more and more of the population.
In one sense it's good that someone has the flexibility to maintain an asset that still has real value but a different use case than its original intention, but on the other side that money could be propping up something that doesn't really have long-term value; distorting the market by delaying entries by newer or more efficient technologies.
I remember seeing a comment the other day about how the next recession could probably/easily not be housing (the last one) or tech (the one before that), but the next big chunk of the economy that's under-studied and not well known. Maybe it's these pools of cash at the top extracting more $ from everyone below them on the global financial stage. Not sure what the failure point or mechanism would be though.