Another great article from Felix Salmon at Reuters, discussing the differences between a credit union payday-like product and those offered by traditional payday lenders.  It’s probably one of the more level-headed approaches to explaining how the product works.

Just one excerpt from the article:

“…what payday lenders are really selling is convenience, at least as much as it is loans. Check cashers, payday lenders, and the like do not keep typical banking hours: they’re open late, they’re open at weekends, and they are generally found in small storefront locations which would not be suitable for a fully-fledged bank branch.

This is entirely rational — you want to be where your customers are, and you need to be able to reach your customers when they’re not working any of their jobs. But at the same time, it’s expensive. And in general, credit unions are already paying for the cost of their overheads, before they start offering any kind of payday loan. So while payday lenders have to cover a lot of overhead from the proceeds of just one product, credit unions have to cover just the marginal cost of the payday loans, which is a great deal smaller. After all, their staff and real estate is already being paid for.”

This was mentioned by Salmon in the article we just posted about: “At the same time, however, the loan companies do themselves no favors at all by being incredibly opaque about the terms on their loans and the interest rates they’re charging; I’d never actually recommend that someone go to such a shop, since the entire business model seems to be based on exploiting sophistication asymmetries and charging as much interest as possible.”

As a reminder to any payday advance consumer doing business with a CFSA Member, this is one of our Best Practices that we believe sets us apart from the rest:

1. FULL DISCLOSURE: A member will comply with the disclosure requirements of the state in which the payday advance office is located and with federal disclosure requirements including the Federal Truth in Lending Act. A contract between a member and the customer must fully outline the terms of the payday advance transaction. Members agree to disclose the cost of the service fee both as a dollar amount and as an annual percentage rate (“APR”). A member, in compliance with CFSA guidelines where they do not conflict with applicable federal, state or local requirements, will further ensure full disclosure by making rates clearly visible to customers before they enter into the transaction process.

This story from Felix Salmon of Reuters discusses a short-term credit customers’ borrowing experience and that of her relationship with a credit union of 15 years. Interesting findings from him in the discussion of a borrower’s credit score:

Hal James (CEO of Missouri Credit Union) works on changing “poor management of money that they’ve got”. The credit union, he said, will “work to get the savings started”, rather than add more debt: “if you think that you have to borrow more money to improve your credit score, that’s not a solution. It’s not going to work.”

Sadly, James is wrong about this. The information going in to your credit score includes absolutely nothing about your salary, or your savings rate, or any of your assets. Let’s say that I defaulted on a lot of loans five years ago, which ended up being charged off; since then, I’ve avoided all credit, got a high-paying job, lived within my means, built up my savings — and inherited a million dollars to boot. What happens to my credit score? Very little. As the bad loans on my credit report drift ever further into the past, they will have a slightly less negative effect on my credit score. But without anything positive on there, my score will remain abysmally low indefinitely.

James told me that “you can go from 500 to the mid-600s if your bad credit drifts far enough behind you”. I checked this with FICO, and it’s just not true. Once you have a bad credit score, the only way you can make a significant improvement to it is to borrow money and pay it back.

As it pertains to access to credit, and why borrowers choose to go with short-term lending products, Salmon said this:

Is it a good idea for the professor to be taking out loans at 40% interest rates? Really, she didn’t have much of a choice. She needed the money, she got precious little help from her credit union, and the loan company was friendly and extended her the cash on terms she could afford.

What’s more, the professor’s relationship with World Finance has indeed improved her credit. Since taking out that first loan, she’s obtained two different credit cards, and also bought a brand-new BMW with 2.9% financing. All with essentially no help at all from her primary financial institution, which is Missouri Credit Union. The debt the professor is taking on may or may not be wise, given her unique individual circumstances. And the credit union could in theory be a valuable resource in terms of helping her work out whether, for instance, she can really afford that car. But the relationship there is broken, and I see no chance that it will be fixed.

Looks like Richard Cordray’s CFPB head nomination is gaining some traction. Reuters is reporting that the Senate Banking Committee is expected to vote on Obama’s pick to run the new consumer agency on October 6.

U.S. regulators are still feeling the fallout from the D.C. Circuit Court ruling from late last month, scrambling to bulletproof dozens of financial reforms.

The ruling sent shivers down the spines of the SEC and Commodity Futures Trading Commission, and has them bracing for more court challenges as they strain to complete well over 100 rules called for in Dodd-Frank that was enacted last year.

“I was afraid of this all along,” said Jill Sommers, a Republican commissioner at the CFTC. “The SEC had a rule that was challenged on grounds that I think there are concerns in our rules about, and I feel like we could equally have the same kind of challenges.”

Scott O’Malia, the other Republican CFTC commissioner, says he is going to call for a briefing with agency staff to review the ruling and assess the agency’s vulnerabilities.

“I just don’t want to make any mistakes that set us back,” O’Malia said. “It’s a very serious concern.”

As mobile payment technology continues to surface as a popular method for consumers, the million dollar question that could keep it in its infancy stage is whether or not it’s safe for consumers. Consumers Union came out with a recent report discussing the gap between mobile payment systems and the popular topic of consumer protection.

“As more Americans start using mobile phones to make purchases, we need to make sure that consumer protections keep pace with all the new technological advances,” Michelle Jun, senior attorney for Consumers Union’s Defend Your Dollars campaign said in a statement.  “Consumers shouldn’t have to worry that a lost or stolen mobile phone or billing error could turn into a costly financial headache.”

And nobody really has the answer to the question, not even the industry’s trade association.

A spokesman for ATT Wireless said the company would not comment on the report and suggested the answer ought to come from the industry’s trade association, the CTIA. The CTIA responded by saying an answer ought to come from the carriers. Sprint said it had nothing to say about it right now. Of the largest carriers, only Verizon Wireless had something to say. Verizon would not address the report specifically, but a spokesman did discuss the issue.

Senator Richard Shelby, the leading Republican on banking issues, has finally thrown support to one of the White House’s nominees in government agency leadership. In recent months, Shelby’s opposition helped sink the nominations of Peter Diamond to be a governor of the Federal Reserve Board and Joseph Smith to be director of the Federal Housing Finance Agency. But now he’s singing a different tune with the FDIC.

“I believe he is a credible, honest man and I look forward to supporting him,” Shelby told Reuters in an interview about Martin Gruenberg.

No, we don’t hate Elizabeth Warren. But apparently it’s a list-kinda-reporting day and this Reuters article says there’s five reasons why banks do. And it’s not cause they don’t like the way she dresses.

Weak consumer regulation was the norm, but banks love the status quo

… “The CFPB will be the first regulator in American history that didn’t answer to the banks, but to their customers.”

Mortgage abuses were rampant

… “Somebody fell asleep on their watch in Washington like Rip Van Winkle. A consumer financial bureau would keep an eye on an industry that’s operated in darkness for too long.”

Credit abuses are rampant

“… My one errant transaction could lock in a short-term profit for the bank that would easily rival the near-20 percent margins from industries like pharmaceuticals, Internet services and network equipment. I’m all for profits, but I can get a better deal from Louis the loan shark. A consumer bureau might be able to rein in these practices.”

Junk fees are abundant

… “The CFPB already is working to simplify this morass of incomprehensible forms and even wants your opinion on new proposed versions.”

Making simple math simple again

… “Do you know what a LIBOR index is and “lifetime maximum rates?” The banks don’t want you to know this because this is how much your monthly payment can climb based on a variable index. If the index goes up, so does your payment.”

The Florida Attorney General’s office has announced that they will begin an investigation of five prepaid card companies (First Data Corp, Green Dot Corp, Account Now Inc, NetSpend Corp and Unirush Financial Services LLC) looking to find “deceptive and unfair practices”.

“Failing to disclose fees is essentially stealing money from consumers,” Attorney General Pam Bondi said in a statement.