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Why Shares of Home Loan Servicing Solutions Gapped Up

Although we don’t believe in timing the market or panicking over market movements, we do like to keep an eye on big changes — just in case they’re material to our investing thesis.

What : Shares of Home Loan Servicing Solutions rose as much as 11% after the company announced that it has agreed to be acquired by New Residential Investment for $18.25 per share in an all-cash deal that values the company at $1.3 billion.

So what : The acquisition price represents a meager 9% premium over Friday’s closing price and is 28% below the stock’s July 2013 all-time high. Note that shares of New Residential are up almost as much as those of Home Loan Servicing today, which suggests the market believes the acquirer is capturing a significant value in the transaction.

Indeed, based on the daily price chart I’m looking at, it appears Home Loan Servicing Solutions ;shares have been trading at or above New Residential’s offer price since shortly after 10 a.m. EST. That suggests that the market might expect some (but not much) improvement on the offer.

However, the statement from Home Loan Servicing Solutions ;CEO John Van Vlack suggests that he didn’t enter negotiations with tremendous bargaining power or ambitions [my emphasis]: “I am pleased that this transaction offers our investors cash equivalent to the book value of their shares and addresses the uncertainty associated with our future financing obligations.” Getting paid book value is something to celebrate?

Now what : For investors who didn’t already own shares of Home Loan Servicing Solutions, I wouldn’t recommend buying them now — merger arbitrage (i.e., betting on the completion of announced transactions) is not an arena for individual investors. For existing shareholders, it might be worth hanging on to the shares for a couple weeks to see if a raised offer or new bidder emerges. Beyond that, it’s probably time to sell and move on the next opportunity. New Residential’s acquisition of Home Loan Servicing Solutions is expected to close in the second quarter.

Bank of America + Apple? This device makes it possible.
Apple recently recruited a secret-development “dream team” to guarantee its newest smart device was kept hidden from the public for as long as possible. ;But the secret is out , and some early viewers are claiming it’s ;destined to change everything from banking to health care. In fact, ;ABI Research ;predicts 485 million of this type of device will be sold per year. But one small company makes ;Apple’s ;gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple’s newest smart gizmo, just click here !

The article Why Shares of Home Loan Servicing Solutions Gapped Up originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 – 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

[…]

Federal Regulators to Crack Down on Unaffordable Payday Loans …

Image Shawn-M.-Griffiths_avatar_1381172453-35x35.png

Feb 9, 2015

The New York Times

reported Monday

that federal regulators are expected to draft new rules to govern short-term loans, including car titles and payday loans, which to date have fallen mostly under the jurisdiction of individual state law. While many states have tried to put an end to short-term loans with exorbitant interest rates, payday lenders have found ways to get around these laws or have lobbied state legislatures to soften regulations.

“Such maneuvers by the roughly $46 billion payday loan industry, state regulators say, have frustrated their efforts to protect consumers,” the Times reports.

According to the report, the Consumer Financial Protection Bureau (CFPB) will soon take the first step by federal regulators to reduce the number of unaffordable loans lenders can make. The CFPB, created after the 2008 financial crisis, is an independent agency tasked with protecting consumers in the financial sector. Along with banks and credit unions, payday lenders fall within the agency’s jurisdiction.

In March 2014, the CFPB released a startling report on the realities of payday loans and the effect they have on low-income households and borrowers, the demographic payday lenders target most. The people lenders seek out are in desperate financial situations, and therefore do not thoroughly consider all the facts before signing up for these loans, the fees of which may end up being more than the initial principal.

The initial loan is typically a 14-day loan of no more than $500, though some can exceed this amount. According to the CFPB, these loans carry fees between $10 to $20 for every $100 borrowed.

“A $15 fee, for example, would carry an effective APR of nearly 400% for a 14-day loan,” CNN Money reports.

The CFPB found that over 60 percent of all payday loans are made to individuals who take out 7 or more loans in a row, meaning the accumulated fees end up being more than the initial amount taken out.

“60% of all payday loans are made to individuals who take out 7 or more loans in a row.”@ cfpb

“The bureau found that during a 12-month period, borrowers took out a median of 10 loans,” the Times reports. “Borrowers paid median fees of $458. The median amount borrowed was $350.”

People may recall the Montel Williams commercials for Money Mutual where he makes it sound like short-term loans are the most convenient solution for people who are having money problems and live paycheck to paycheck. Yet, according to the CFPB, these loans are only convenient for people who can pay them back immediately or after no more than one renewal.

For those who can’t, the challenge becomes getting out from under the debt.

“[O]ne Pennsylvania woman who took out a total of $800 in payday loans to help pay for rent after losing her job told the CFPB that she meant for the loan to be only short-term,” the CNN Money article says. “But after rolling over her first loan and eventually taking out another one to help pay for it, she has already paid more than $1,400 towards the debt and still owes more.”

There are currently 35 states that do not have laws regulating short-term lenders. However, even among the states that have made these types of payday loans illegal or have limits in place, lenders have found ways to get around the laws by reclassifying their stores as car-title lenders or using other similar tactics. New rules by the CFPB could make it harder for these companies to get around state regulations and could protect consumers in states that do not currently have these laws.

More articles in Economy

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Photo Credit: Lori Martin / shutterstock.com

About the Author


Shawn M. Griffiths

Shawn is located in the Dallas-Fort Worth area in Texas and has been actively involved in grassroots efforts in the state since 2005. His political philosophy is founded on the principles of individual liberty, limited government, and fiscal responsibility. He is not affiliated with any political party, and has great appreciation for intellectual independence and objective truth.

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[…]

Federal regulators plan payday loan rules to protect borrowers

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A payday loans sign in the window of Speedy Cash, London, December 25, 2013. For the first time, the Consumer Financial Protection Bureau plans to regulate payday loans using authority it was given under the Dodd-Frank law. Photo by Suzanne Plunkett/Reuters.

WASHINGTON — Troubled by consumer complaints and loopholes in state laws, federal regulators are putting together the first-ever rules on payday loans aimed at helping cash-strapped borrowers avoid falling into a cycle of high-rate debt.

The Consumer Financial Protection Bureau says state laws governing the $46 billion payday lending industry often fall short, and that fuller disclosures of the interest and fees – often an annual percentage rate of 300 percent or more – may be needed.

Full details of the proposed rules, expected early this year, would mark the first time the agency has used the authority it was given under the 2010 Dodd-Frank law to regulate payday loans. In recent months, it has tried to step up enforcement, including a $10 million settlement with ACE Cash Express after accusing the payday lender of harassing borrowers to collect debts and take out multiple loans.

A payday loan, or a cash advance, is generally $500 or less. Borrowers provide a personal check dated on their next payday for the full balance or give the lender permission to debit their bank accounts. The total includes charges often ranging from $15 to $30 per $100 borrowed. Interest-only payments, sometimes referred to as “rollovers,” are common.

Legislators in Ohio, Louisiana and South Dakota unsuccessfully tried to broadly restrict the high-cost loans in recent months. According to the Consumer Federation of America, 32 states now permit payday loans at triple-digit interest rates, or with no rate cap at all.

The CFPB isn’t allowed under the law to cap interest rates, but it can deem industry practices unfair, deceptive or abusive to consumers.

“Our research has found that what is supposed to be a short-term emergency loan can turn into a long-term and expensive debt trap,” said David Silberman, the bureau’s associate director for research, markets and regulation. The bureau found more than 80 percent of payday loans are rolled over or followed by another loan within 14 days; half of all payday loans are in a sequence at least 10 loans long.

The agency is considering options that include establishing tighter rules to ensure a consumer has the ability to repay. That could mean requiring credit checks, placing caps on the number of times a borrower can draw credit or finding ways to encourage states or lenders to lower rates.

Payday lenders say they fill a vital need for people who hit a rough financial patch. They want a more equal playing field of rules for both nonbanks and banks, including the way the annual percentage rate is figured.

“We offer a service that, if managed correctly, can be very helpful to a diminished middle class,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, which represents payday lenders.

Maranda Brooks, 40, a records coordinator at a Cleveland college, says she took out a $500 loan through her bank to help pay an electricity bill. With “no threat of loan sharks coming to my house, breaking kneecaps,” she joked, Brooks agreed to the $50 fee.

Two weeks later, Brooks says she was surprised to see the full $550 deducted from her usual $800 paycheck. To cover expenses for herself and four children, she took out another loan, in a debt cycle that lasted nearly a year.

“It was a nightmare of going around and around,” said Brooks, who believes that lenders could do more to help borrowers understand the fees or offer lower-cost installment payments.

Last June, the Ohio Supreme Court upheld a legal maneuver used by payday lenders to skirt a 2008 law that capped the payday loan interest rate at 28 percent annually. By comparison, annual percentage rates on credit cards can range from about 12 percent to 30 percent.

Members of Congress also are looking at payday loans.

Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking, Housing and Urban Affairs Committee, plans legislation that would allow Americans to receive an early refund of a portion of their earned income tax credit as an alternative to a payday loan.

Sen. Elizabeth Warren, D-Mass., wants the U.S. Postal Service to offer check-cashing and low-cost small loans. The idea is opposed by many banks and seems unlikely to advance in a Republican-controlled Congress.

[…]

Are Your Student Loan Payments Higher Than Necessary?

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Source: Tulane Public Relations via Flickr.

If you’re among the millions of Americans who make student loan payments each month, it’s important to know all of the repayment options available to you. Certain plans could lower your monthly payments, freeing up more of your cash.

Here’s an overview of the most advantageous repayment plans, along with the pros and cons of reducing your payment.

The Pay As You Earn plan
The Pay As You Earn is designed to keep your payments low when you’re fresh out of school and not earning much money. Then, as your income grows, so do your repayments.

The required payment amount is actually quite low: It’s capped at either 10% of your discretionary income or what your payment would be under a standard 10-year repayment plan. For the purposes of this calculation, your discretionary income is the difference between your income and 150% of the poverty guidelines for your family size and state of residence.

As an example, let’s say you earn $60,000 per year, live in any of the 48 contiguous states or Washington, D.C. (the poverty guidelines are only different for Alaska and Hawaii), and are married with one child (family size of three). The poverty guideline for 2015 is $20,090, and 150% of that amount is $30,135. Therefore your discretionary income is $60,000 minus $30,135, which comes to $29,865. Divide this over 12 months and apply the 10% rule, and you can see that your monthly payment would be capped at about $250, no matter how high your student loan balance is.

Now, the most common concern I hear is that such a low payment may not even cover the interest on the loans, and therefore it could take decades to pay off the balance. However, under the Pay As You Earn plan, any remaining loan balance will be forgiven after 20 years of on-time payments, regardless of how much is left.

It’s also worth noting that Pay As You Earn isn’t available to all borrowers yet. It was announced last year that the program will be available to all borrowers by the end of 2015, but for now it’s only open to borrowers who took out their first loan after October 2007. For those who are currently ineligible, the Income-Based Repayment, or IBR, plan, offers similar benefits: The payment cap is slightly higher at 15% of discretionary income, and any remaining balance is forgiven after 25 years.

Extended repayment
If you’d prefer payments that stay the same over the years but find the 10-year repayment plan a little too expensive, there’s also the option of an extended repayment plan, which spreads your payments over a longer time frame (up to 25 years). This tends to be an appealing option for people who earn too much to take full advantage of the Pay As You Earn plan but find the 10-year payment amount to be too high to manage along with their other expenses.

Another advantage of the extended option is that your loan balance will go down over time, which can provide a nice boost to your credit score. According to the FICO scoring formula, 30% of your score comes from “amounts owed,” which takes into account, ;among other things, the remaining balances on your loan relative to the original loan amount.

The downsides of choosing the extended repayment plan are that you’ll never be eligible for loan forgiveness as you would with the Pay As You Earn plan, and you’ll end up paying a lot more interest over the life of the loan than you would under a standard 10-year repayment plan.

For example, if you owe $35,000 in student loans at 6% interest, your monthly payment under the standard 10-year plan would be $389 per month. So, over the life of the loan, you’ll pay $11,680 in interest. However, if you choose to pay it back over 25 years, your monthly payment falls to about $225, but you’ll end up paying $32,650 in interest.

The downside to lower payments
As with anything else in life, there are pros and cons to all repayment options, including Pay as You Earn and extended repayment. As I mentioned before, you’ll end up paying more interest with an extended repayment plan than with a standard repayment plan, and if your income increases over the years, this could be the case with Pay As You Earn as well.

And with Pay As You Earn, remember that your payments will rise in proportion to your income, and this could cause a rather sharp increase if you get a raise or a higher-paying job. In the earlier example of a borrower who earns $60,000 per year, a promotion to a job paying $80,000 per year (33% raise) would increase the allowable loan payment from $250 to $415 (67% increase). With a raise that size, a higher loan payment isn’t the end of the world, but it’s definitely something to keep in mind.

Aside from these drawbacks, the Pay as You Earn plan and the extended repayment plan can be excellent ways to manage your student loan expenses while still building up a solid payment history.

Bank of America + Apple? This device makes it possible.
Apple recently recruited a secret-development “dream team” to guarantee its newest smart device was kept hidden from the public for as long as possible. ;But the secret is out , and some early viewers are claiming it’s ;destined to change everything from banking to health care. In fact, ;ABI Research ;predicts 485 million of this type of device will be sold per year. But one small company makes ;Apple’s ;gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple’s newest smart gizmo, just click here !

The article Are Your Student Loan Payments Higher Than Necessary? originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 – 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

[…]

Banks say no room to cut loan rates despite RBI's rate cut

Only three of the country’s 45 commercial banks have cut base lending rates since the Reserve Bank of India’s (RBI) surprise easing on January 15, hurting the government’s drive to lift business investment.

Bank executives insist they cannot lower loan rates despite the official interest rate cut because cash conditions are tight, and money markets are little changed since the cut, but RBI insiders see that as more an excuse to protect profit margins.

The failure to pass on the rate cut to businesses and consumers has both diluted the impact of monetary policy and weakened the push by the government to quickly unlock more credit and spur investments as the economy struggles to recover from its slowest growth rates since the 1980s.

“We are already providing liquidity higher than what the banking system requires. We do not plan to increase that amount,” said a senior policymaker with knowledge of the central bank’s cash management strategy.

“Banks need to manage their assets and liabilities more efficiently,” he added.

Bankers say the average funds the RBI provides the market has been steady at around Rs 1 lakh crore ($16.2 billion) a day since the repurchase (repo) rate was cut by 25 basis points to 7.75 per cent.

The slashed rate has had little impact in financial markets, suggesting a blockage in policy transmission.

The interbank overnight cash rate, a key measure of cash conditions that tends to track the repo rate, has remained around 8 per cent despite the rate cut.

Furthermore, three-month wholesale deposit rates have held near 8.50 per cent and the one-year wholesale deposit rate has risen 10 basis points to 8.60 per cent.

The Reserve Bank manages the amount of liquidity in the market to aid transmission of its rate decisions. The next scheduled policy review is on Tuesday, but analysts do not expect it to ease again at least until after the Union Budget at the end of February.

“If RBI provided slightly more liquidity than what it is providing now, it will force banks to cut their base lending rates,” said CVR Rajendran, chairman and managing director at state-run Andhra Bank.

Analysts say the RBI will eventually have to inject more funds, although may not as much as lenders want, if it continues easing monetary policy.

Bank of America-Merrill Lynch believes the central bank will need to inject around US $49 billion in new money to the banking system during 2015-16 (April-March) if lenders are to lower lending rates enough to meet the brokerage’s projections for a recovery in credit growth to 17.5 per cent in the comig 2015-16 financial year.

Credit grew at an annual rate of 10.7 per cent in early January, near decade lows, and the Narendra Modi government has been seeking lower interest rates to help spark a revival in lending to business.

Earlier in January, the RBI mandated that lenders change the methodology used to compute the base rate, or the minimum lending rate, in a bid to spur more lending.

Banks continue to suffer from deteriorating asset quality, which is pressuring earnings. Bank of Baroda, the country’s second-biggest lender by assets, on Friday posted a 69 per cent fall in quarterly profit due to higher provisions for bad loans and a surge in tax expenses.

An executive at a public sector bank acknowledged profit was a factor in the reluctance to lower lending rates but said liquidity was a bigger issue.

“There is a lot of micro-management of liquidity by RBI. Banks are taking their own time to cut lending rates because we are still not sure about RBI’s liquidity policy,” he said.

“Typically banks are faster in raising lending rates than cutting to enjoy fat interest margins,” the executive added.

(Reuters)

[…]

Cash America Announces Dividend Increase and Declares Quarterly Dividend

FORT WORTH, Texas–(BUSINESS WIRE)–

Cash America International, Inc. (CSH) reported today that the Board of Directors, at its regularly scheduled quarterly meeting, increased the cash dividend amount to $0.05 (5 cents) per share on common stock outstanding. The newly declared dividend represents a 43% increase in the Company’s previous quarterly dividend of $0.035 (3.5 cents) per share paid each quarter since the first quarter of 2007. The Company has consistently paid a quarterly dividend since 1989. The dividend will be paid at the close of business on February 25, 2015 to shareholders of record on February 11, 2015.

Commenting on the board’s decision, Daniel R. Feehan, President and Chief Executive Officer said, “We are pleased to provide our shareholders with this increase in our quarterly cash dividend, which demonstrates our efforts to provide shareholders with a regular cash return based on the healthy cash flow generating capability of their Company.”

In a separate release today, the Company also announced that the board of directors approved a new open market share repurchase authorization for up to 4 million shares of the Company’s common stock. See the separate press release for additional details.

About the Company

As of December 31, 2014 Cash America International, Inc. (the “Company”) operated 943 total locations offering specialty financial services to consumers, which included the following:

859 lending locations in 21 states in the United States primarily under the names “Cash America Pawn,” “SuperPawn,” “Cash America Payday Advance,” and “Cashland;” and 84 check cashing centers (all of which are unconsolidated franchised check cashing centers) operating in 12 states in the United States under the name “Mr. Payroll.”

For additional information regarding Cash America International, Inc. visit its website located at www.cashamerica.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This release contains forward-looking statements about the business, financial condition, operations and prospects of the Company. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation: the effect of, compliance with or changes in domestic pawn, consumer credit, tax and other laws and governmental rules and regulations applicable to the Company’s business or changes in the interpretation or enforcement thereof; the regulatory and examination authority of the Consumer Financial Protection Bureau, including the effect of and compliance with a consent order the Company entered into with the Consumer Financial Protection Bureau in November 2013; risks related to the separation of the Company and Enova International, Inc.; a claim relating to the terms of the Company’s 5.75% senior notes; the actions of third parties who provide, acquire or offer products and services to, from or for the Company; public and regulatory perception of the Company’s business, including its consumer loan business and its business practices; the effect of any current or future litigation proceedings or any judicial decisions or rule-making that affect the Company, its products or its arbitration agreements; fluctuations, including a sustained decrease, in the price of gold or deterioration in economic conditions; a prolonged interruption in the Company’s operations of its facilities, systems and business functions, including its information technology and other business systems; changes in demand for the Company’s services and changes in competition; impairment risk related to the Company’s goodwill and intangible assets; the Company’s ability to attract and retain qualified executive officers; the ability of the Company to open new locations in accordance with its plans or to successfully integrate newly acquired businesses into the Company’s operations; interest rate fluctuations; changes in the capital markets, including the debt and equity markets; changes in the Company’s ability to satisfy its debt obligations or to refinance existing debt obligations or obtain new capital to finance growth; security breaches, cyber-attacks or fraudulent activity; acts of God, war or terrorism, pandemics and other events; the effect of any of such changes on the Company’s business or the markets in which it operates; and other risks and uncertainties indicated in the Company’s filings with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control, nor can the Company predict, in many cases, all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this release, terms such as “believes,” “estimates,” “should,” “could,” “would,” “plans,” “expects,” “anticipates,” “may,” “forecasts,” “projects” and similar expressions and variations as they relate to the Company or its management are intended to identify forward-looking statements. The Company disclaims any intention or obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of this release.

FinanceInvestment & Company InformationCompany Contact:

Cash America International, Inc.

Thomas A. Bessant, Jr., 817-335-1100

[…]

Overland Park's AMG Services agrees to record settlement over …

An Overland Park-based online payday lending operation accused of deceiving borrowers by charging inflated fees has agreed to pay federal regulators $21 million, the largest such settlement ever.

Most of the record payout will be returned to borrowers as refunds. AMG Services Inc. of Overland Park and its partner company, MNE Services of Miami, Okla., also will forgive $285 million in unpaid fines and loans still owed by customers, according to the settlement announced Friday by the Federal Trade Commission.

“The settlement requires these companies to turn over millions of dollars that they took from financially distressed consumers, and waive hundreds of millions in other charges,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection, said in a prepared statement.

“It should be self-evident,” Rich said, “that payday lenders may not describe their loans as having a certain cost and then turn around and charge consumers substantially more.”

Unexpected fees and higher-than-advertised interest rates often left customers with debts that more than tripled the amounts they had originally borrowed, the FTC alleged in court documents.

The settlement includes no admission of guilt by the companies. Efforts to reach a company attorney late Friday were unsuccessful.

In legal filings, AMG had argued that its affiliation with American Indian tribes should make the company immune to legal action.

It said the tribes’ sovereign status meant they weren’t subject to state or federal laws. A federal magistrate judge disagreed, ruling in 2013 that the lenders had to obey federal consumer protection statutes, even if they were affiliated with tribes. A U.S. District Court judge upheld that ruling last year.

AMG claimed to be owned by the Miami and Modoc tribes of Oklahoma and the Santee Sioux of Nebraska. But the tribes reportedly received only 1 to 2 percent of the revenue from each loan.

The real beneficiary allegedly was race car driver Scott Tucker, who used $40 million collected from borrowers to sponsor his racing team, according to a 2012 complaint filed by the FTC. Tucker has not settled the FTC charges against him. His case is pending before a federal judge in Nevada.

Lawyers for Tucker have previously said the business practices of the tribes were “fully compliant with federal law” and they would contest the allegations.

A growing number of payday lenders have migrated from storefronts to the Internet in recent years in a bid to sidestep state laws designed to curb predatory loans. Some companies exploit ties with tribes to avoid federal regulation, consumer advocates say.

Friday’s record payday loan settlement is significant because it shows that tribal immunity is not working as a business model for payday lenders, said Ed Mierzwinski, consumer program director of the consumer advocacy group U.S. PIRG.

“Online payday lenders have tremendous power to reach into consumer bank accounts illegally and take excess fees,” Mierzwinski said. “Fortunately, FTC and the courts rejected this one’s claims of tribal immunity from the law.”

Law enforcement officials across the country have received more than 7,500 consumer complaints about the firms in Friday’s settlement, according to the FTC.

The FTC said the two companies are both part of the same lending operation. The agency said AMG serviced cash advance payday loans offered by MNE on websites using the trade names Ameriloan, United Cash Loans, US Fast Cash, Advantage Cash Services, and Star Cash Processing.

The websites advertised a one-time finance fee and promised that customers could get loans “even with bad credit, slow credit or no credit.”

But the FTC says borrowers were misled about the real annual percentage rate of the loans and didn’t realize they would be charged additional finance fees every time the companies made withdrawals from their bank accounts.

Contracts with borrowers indicated that a $300 loan would cost $390 to repay, for example, when it really cost $975, according to the FTC.

The agency also alleges that the companies illegally made pre-authorized withdrawals from customers’ bank accounts as a condition of credit.

The Community Financial Services Association of America, a trade group for the payday lending industry, issued a statement Friday that distanced the group from the two companies involved in the settlement and expressed support for the FTC’s actions.

“These unscrupulous practices are not representative of the entire payday lending industry nor the online sector of it, and they harm the reputations of (association) members who uphold the highest lending standards in the industry,” the statement said. “More importantly, these bad actors create an even more confusing environment for consumers, making them more susceptible to fraud and abuse.”

AMG previously had reached a partial settlement with the FTC in 2013 over allegations that the company had illegally threatened borrowers with arrest and lawsuits. That settlement prohibited AMG from using such tactics to collect debts.

To reach Lindsay Wise, call 202-383-6007 or send email to lwise@mcclatchydc.com. Twitter: @lindsaywise.

[…]

A new way to prey on poor: car title loans

The rusting 1994 Oldsmobile sitting in a driveway just outside St. Louis was an unlikely cash machine. That was until the car’s owner, a 30-year-old hospital lab technician, saw a television commercial describing how to get cash from just such a car, in the form of a short-term loan.

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The lab technician, Caroline O’Connor, who needed about $1,000 to cover her rent and electricity bills, believed she had found a financial lifeline. “It was a relief,” she said. “I did not have to beg everyone for the money.”

Her loan carried an annual interest rate of 171 percent. More than two years and $992.78 in debt later, her car was repossessed.

“These companies put people in a hole that they can’t get out of,” O’Connor said.

The automobile is at the center of the biggest boom in subprime lending since the mortgage crisis. The market for loans to buy used cars is growing rapidly. And similar to how a red-hot mortgage market once coaxed millions of borrowers into recklessly tapping the equity in their homes, the new boom is also leading people to take out risky lines of credit known as title loans.

In these loans, which can last as long as two years or as little as a month, borrowers turn over the title of their cars in exchange for cash — typically a percentage of the cars’ estimated resale values.

“Turn your car title into holiday cash,” TitleMax, a large title lender, declared in a recent television commercial, showing a Christmas stocking overflowing with money.

More than 1.1 million households in the United States used auto title loans in 2013, according to a survey by the Federal Deposit Insurance Corporation.

For many borrowers, title loans are having ruinous financial consequences, causing owners to lose their vehicles and plunging them further into debt. A review by the New York Times of more than three dozen loan agreements found that after factoring in various fees, the effective interest rates ranged from nearly 80 percent to over 500 percent. While some loans come with terms of 30 days, many borrowers, unable to pay the full loan and interest payments, say that they are forced to renew the loans at the end of each month, incurring a new round of fees.

Many people find that they are struggling to keep up almost as soon as they drive off with the cash. As a result, roughly one in every six title-loan borrowers will have the car repossessed, according to an analysis of title loans by the Center for Responsible Lending, a nonprofit in Durham, N.C.

“This is nothing but government-authorized loan sharking,” said Scott A. Surovell, a Virginia lawmaker who has proposed bills that would further rein in title lenders.

The lenders argue that they are providing a source of credit for people who cannot obtain less-expensive loans from banks. The high interest rates, the lenders say, are necessary to offset the risk that borrowers will stop paying their bills.

• • •

The title lending industry thrives because of the car’s importance.

While people seeking title loans are often at their most desperate — dealing with a job loss, a divorce or a family illness — the lenders are willing to extend them loans because they know that most borrowers will pay their bill to keep their cars. Some lenders do not even bother to assess a borrower’s credit history.

“The threat of repossession turns the borrower into an annuity for the lenders,” said Diane Standaert, the director of state policy at the Center for Responsible Lending.

Unable to raise the thousands of dollars he needed to repair his car, Ken Chicosky, a 39-year-old Army veteran, felt desperate. He received a $4,000 loan from Cash America, a lender with a storefront in his Austin, Tex., neighborhood.

The loan, which came with an annual interest rate of 98 percent, helped him fix up the 2008 Audi that he relied on for work, but it has sunk his credit score. Chicosky, who is also attending college, uses some of his financial aid money to pay his title-loan bill.

Chicosky said he knew the loan was a bad decision when he received the first bill. It detailed how he would have to pay a total of $9,346 — a sum made up of principal, interest and other fees. “When you are in a situation like that, you don’t ask very many questions,” he said.

The title lenders are benefiting as state authorities restrict payday loans, effectively pushing payday lenders out of many states. While title loans share many of the same features — in some cases carrying rates that eclipse those on payday loans — they have so far escaped a similar crackdown.

In 21 states, car title lending is expressly permitted, with title lenders charging interest of up to 300 percent a year. In most other states, lenders can make loans with cars as collateral, but at lower interest rates.

Johanna Pimentel said she and both of her brothers had taken out multiple title loans.

“They are everywhere, like liquor stores,” she said.

Pimentel, 32, had moved her family out of Ferguson, Mo., to a higher-priced suburb of St. Louis that promised better schools. But after a divorce, she had trouble paying her rent.

Pimentel took out a $3,461 title loan using her 2002 Suburban as collateral. After falling behind, she woke up one morning last March to find that the car had been repossessed. Without it, she could not continue to run her day care business.

A new way to prey on poor: car title loans 01/05/15 [Last modified: Monday, January 5, 2015 4:07pm]
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Reward offered for robber of cash advance store who bound clerk


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[…]

Subprime boom ties loans to car titles

The title lenders are seizing upon a broad retrenchment among banks, which have become wary of making loans to borrowers on the fringe of the financial system. Regulations passed after the financial crisis have made it much more expensive for banks to make loans to all but the safest borrowers.

Read MoreRegulators press banks for more on auto loan exposure

The title lenders are also benefiting as state authorities restrict payday loans, effectively pushing payday lenders out of many states. While title loans share many of the same features — in some cases carrying rates that eclipse those on payday loans — they have so far escaped a similar crackdown.

In 21 states, car title lending is expressly permitted, with title lenders charging interest of up to 300 percent a year. In most other states, lenders can make loans with cars as collateral, but at lower interest rates.

Seeing the regulatory landscape shift, some of the country’s largest payday lenders are switching gears. When Arizona effectively outlawed payday loans, ACE Cash Express registered its payday loan storefronts in the state as car title lenders, state records show.

Lenders made similar changes in Virginia, where lawmakers outlawed payday lending in 2010. But title lenders were untouched by that law and have expanded throughout the state, drawing business from Maryland.

The number of stores offering title loans in Virginia increased by 24 percent from 2012 to 2013, according to state records. Last year, the lenders made 177,775 loans, up roughly 612 percent from 2010, when the state banned payday lending.

In Tennessee, the number of title lending stores increased by about 22 percent from 2011 to 2013, reaching 1,017.

That is a small fraction of the industry’s overall size, state regulators say, because only a handful of states keep statistics. Legal aid offices in Arizona, California, Georgia, Missouri, Texas and Virginia report that they have experienced an influx of clients who have run into trouble with the loans.

“The demand is there for people who are desperate for money,” said Jay Speer, the executive director of the Virginia Poverty Law Center.

Loopholes and Adversity

When Tiffany Capone suggested that her fiancé, Michael, take out a $10,000 TitleMax loan with a 119 percent interest rate, she figured it would be a temporary fix to pay the bills. But this summer, after Michael fell behind on the loan payments, the couple’s three-year-old Hyundai was repossessed.

“It had my child’s car seat in the back,” said Ms. Capone, of Olney, Md.

With their car gone, the couple had to sell most of their furniture and other belongings to a pawnshop so they could afford to pay for taxis to ferry Michael, a diabetic with a heart condition, to his frequent doctors’ appointments. The hardships caused by title loans are being cited as one of the big challenges facing poor and minority communities.

“It is a form of indenture,” said Robert Swearingen, a lawyer with Legal Services of Eastern Missouri, adding that “because of the threat of repossession, they can string you along for the rest of your life.”

Johanna Pimentel said she and both of her brothers had taken out multiple title loans.

“They are everywhere, like liquor stores,” she said.

Ms. Pimentel, 32, had moved her family out of Ferguson, Mo., to a higher-priced suburb of St. Louis that promised better schools. But after a divorce, her former husband moved out, and she had trouble paying her rent.

Ms. Pimentel took out a $3,461 title loan using her 2002 Suburban as collateral.

After falling behind, she woke up one morning last March to find that the car had been repossessed. Without it, she could not continue to run her day care business.

Pointing to such experiences, lawmakers in some states — regulating the industry largely falls to states — have called for stricter limits on title loans or outright bans.

In Virginia, lawmakers passed a bill in 2010 that institutes some restrictions on the practice, including preventing lenders from trying to collect money from customers once a car has been repossessed. That same year, Montana voters overwhelmingly backed a ballot initiative that capped rates on title loans at 36 percent.

But for every state where there has been a crackdown, there are more where the industry has mobilized to beat back regulations.

In Wisconsin, it took the title loan industry only one year to reverse a ban on the loans that had been put in place in 2010. In New Hampshire in 2008, state legislators enacted a law that put a 36 percent ceiling on the rates that title lenders could charge. Four years later, though, lobbyists for the industry won a repeal of the law.

“This is nothing but government-authorized loan sharking,” said Scott A. Surovell, a Virginia lawmaker who has proposed bills that would further rein in title lenders.

Even when there are restrictions, some lenders find creative ways to continue business as usual. In California, where the interest rates and fees that lenders can charge on loans for $2,500 or less are restricted, some lenders extend loans for just over that amount.

Sometimes the workarounds are more blatant.

The City of Austin allows title lenders to extend loans only for three months. But that did not stop Mr. Chicosky, the veteran who borrowed $4,000 for car repairs, from getting a loan for 24 months.

Last year, after applying for a loan at a Cash America store in Austin, Mr. Chicosky said, a store employee told him that he would have to fill out the paperwork and pick up his check in a nearby town. Mr. Chicosky’s lawyer, Amy Clark Kleinpeter, said the location switch appeared to be a way to get around the rules in Austin.

The lender offered a different explanation to Mr. Chicosky. “They told me that they didn’t have a printer at the Austin location that was big enough to print my check,” he said.

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