The Financial Angle – October 2015

Borrower Beware

The landscape for the lending industry has changed dramatically over the past decade. There has been a surge in regulation intended to control discriminatory lending and to provide borrowers with increased protection from abusive lending practices. At the same time, there has been a significant expansion of online lenders and financial service providers. In many ways the growth in online financial services in recent years mirrors that seen among online retailers in the early 2000s. Unfortunately, a number of these providers use the Internet and current technology to circumvent the law and/or regulation, while others tend to bury the fine details about the cost of their services deep in their website disclosures.

One of the most blatantly predatory groups of online lenders today are payday/short-term lenders that take advantage of relationships with Native American tribes. They use the tribe’s exemption from regulations (interest rate caps, etc.) and its sovereign immunity to avoid required “clear and concise” disclosures and lending prohibitions.  In return, the tribe is promised a portion of the revenue generated by the lending activity.

Northern Plains Funding, which claims to be run by the Fort Belknap Indian Tribe of Montana, offers small dollar loans, but allows longer repayment terms than most payday lenders. Their website clearly displays why someone should get a loan from them. However, in order to find out what it really costs to borrow from them you need to dig deep. Once there, you will find that a $300 loan for a term of 24 months at 780% APR (Annual Percentage Rate) will end-up costing you $2,342.73 by the time the loan is paid off. This type of rate is not new for the payday loan industry, but what makes this different is that the lender may be disregarding state laws by lending to individuals within those states. Additionally, Northern Plains Funding and others like them don’t provide a local physical location to visit should a dispute arise, making resolution much more frustrating. Another lender, using a Native American tribe as a shield, violated their borrowers’ rights by failing to answer questions about their loans and provide documentation when requested. Federal regulators have recently cracked down on this lender. A number of states have also started to fight back by taking on these lenders for circumventing state laws and prohibitions on certain forms of lending.

Another group of online financial service providers are those that help to “settle debts” or provide “debt relief”. Their activities most often deal with assisting debtors to reduce the outstanding balance on credit cards to allow them to pay the debt off more quickly. I visited the website of one of these companies recently and looked through the fine print to determine how they are compensated. What I found is that they collect a fee which diminishes the amount of the savings they achieve for the debtor. Their guarantee is that they will save the debtor, at a minimum, the amount they are required to pay them in fees for the service. That being the case, the debtor would be better off simply paying the funds to the creditor. No creditor is under obligation to negotiate the balance of a debt with these companies. If the creditor will not negotiate the debt with the debtor themselves, they are not likely to do so with a debt relief company. Many of these services are simply a way to get a debtor’s hopes up and force them to pay fees that could have otherwise gone to pay down the debt. The debtor may only be in need of a short-term payment plan in order to get back on their feet and that does not require a middleman. Directing funds through such companies in order to have them pay the debt on behalf of the debtor puts the debtor’s funds at risk. There were many stories about companies claiming to be assisting homeowners during the mortgage crisis by collecting their payments and/or fees with the promise of helping them to get a loan modification. In many instances the company took the money, never secured the modification and disappeared, causing the homeowner to end up in an even worse position. For additional information on debt settlement, including more on the downside, visit the Federal Trade Commission’s Consumer Site by clicking here. Credit counseling services, provided by non-profit organizations and the WSSC Employee Assistance Program, are a wonderful alternative to these debt settlement companies.

There is a reason why the financial services industry is so heavily regulated. Unfortunately, many of the newest online financial service providers have business models heavily based upon technology and they have yet to be subject to the same levels of regulation as credit unions, banks, and other traditional financial service providers. In some cases, these providers only allow electronic communications which is wonderful when a consumer is not having issues with the service, but can be extremely frustrating if there is a problem.  The vast majority of these providers are legitimate, but the consumer is left to figure out who they can and who they cannot trust. The Internet has made it simple to cross state lines and national borders and has also allowed predatory lending and fraud to expand at minimal cost to those looking to take advantage of consumers and avoid state regulations in the process.  Regulators and legislators are closely monitoring the evolution of online financial services and it is likely that in the future any company providing financial services will be equally regulated regardless of the method in which they provide their services.

If you are planning to use a financial service provider that only has an online presence, make sure you determine how they will handle disputes, etc., how you would contact them should you need to, and whether they are overseen by a financial industry regulator. If they will hold any of your funds, be certain to verify that they are federally insured. It is important that the consumer does their homework and asks the right questions. At the end of the day, if it sounds too good to be true, it likely is.

When you are in the market to borrow, always keep in mind that your credit union has been here for 50 years and is a financially strong, federally regulated and insured financial institution!

Published October 22, 2015

Checkout the following web sites when researching your next vehicle:

Kelly Blue Book
J.D. Power and Associates
Consumer Reports
Car and Driver
Motor Trend
Insurance Institute for Highway Safety

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