Average loans, jumbo interest
Hesson knew she did not have the money to repay LoanMe. But she was hoping the loan would tide her over until she could qualify for an additional federal pension — which ended up being denied.
“I didn’t like not paying bills,” she said. “But they made it so easy.”
Repayment squeeze
Advocates say Hesson’s story has become common over the past several years.
Leigh Ferrin, an attorney at the nonprofit Public Law Center in Santa Ana, said about 1 in 3 bankruptcy cases that crosses her desk has a high-interest installment lender as a creditor.
“We see loans with 90% APR, 100%, 130% — that’s the new normal, which is kind of depressing,” she said.
When borrowers stop paying, lenders say they have little recourse to get the money they are owed — though that doesn’t mean they don’t try.
Jefferson, the LoanMe borrower, asked for a settlement or deferred payments, telling the company she hoped to provide a Thanksgiving meal and Christmas presents for her 5-year-old granddaughter.
“I am trying to make it so I can pay you and still live,” she wrote to LoanMe.
She said the company’s customer service representatives told her they didn’t offer settlements or modifications. One, she said, even scolded her for taking out a loan “if you didn’t know what you were doing.”
Collection calls came as many as 15 times a day on her cell, landline and at the office. Jefferson said she blocked LoanMe’s number, only to have the Orange County company call with Los Angeles area codes.
“I was going to bed and waking up to LoanMe,” she said.
After Jefferson hired an attorney, she said LoanMe changed its tune and offered a loan modification.
Williams said the company offered Jefferson seven “offers of assistance” starting the month she stopped paying, which would have been before she hired an attorney.
He said Jefferson ignored or declined those offers. The company also said interest rates and loan terms are “prominently disclosed” and that Jefferson provided a document that showed monthly net income of approximately $4,000 and monthly debts of $822.
But according to a bank statement reviewed by The Times, Jefferson took in $3,165 from her job and child support during the month before she got the loan, and had racked up nearly $2,000 in overdraft fees in the first six months of 2015.
LoanMe never sued Jefferson to recover money owed, but that is not always so.
In 2016 and 2017, LoanMe sued more than 3,000 borrowers in Los Angeles County small claims court, seeking repayment.
And in numerous bankruptcy cases, LoanMe has gone after borrowers alleging they either took out loans with no intent to repay them or were insolvent at the time they applied for loans — something good underwriting might catch.
Over the last two years, LoanMe has been listed as a plaintiff in 22 California bankruptcy cases, challenging some part of the proceeding.
In one San Diego case filed last July, the company said the customer borrowed $5,100 at an APR of 106%, made a single payment, then filed for bankruptcy protection.
LoanMe’s attorneys argued that the debt should not be discharged because the borrower “knew or should have known he had no ability to repay the loan and/or was insolvent at the time the loan was obtained.”
The company’s court filing includes a copy of the borrower’s loan application, which indicates he told the company he had monthly income of $2,700 — and zero monthly expenses.
Rees of Elevate says his company makes collection calls and sells loans to thirdparty collection agencies — but it generally does not take legal action against borrowers. Between 20% and 25% of Elevate’s loans are charged off, and the company stops trying to collect.
“In nonprime, there is a real chance people will not be able to pay off the loan,” Rees said. “So you price the stated APR appropriately, and if the customer does have stresses, you don’t pile on.”
Rees said among Elevate borrowers in California who repay their loans in full, 99% pay early, so the company rarely collects as much interest as the rates and terms suggest.
At Orange County-based CashCall, an early player in the market for these loans, about 40% of borrowers defaulted and 50% paid early, according to written testimony by its chief financial officer in a long-running court case over the company’s interest rates.
With steep interest rates, the loans can be profitable despite the high number of defaults and early payoffs. But they can also lead to big losses.
CashCall lost money in 2003 and 2004 when the business was starting out, according to financial reports. Although it made a total of $39.6 million in 2005 and 2006, the company lost $25.6 million in 2007 as default rates climbed in the run-up to the recession.
Elevate, which went public last year, lost a combined $42.3 million in 2015 and 2016, though it was on pace for a profitable 2017, according to its most recent SEC filings.
Reform challenges
One thing lenders and advocacy groups agree on: There is demand for these loans, driven by low wage growth, climbing housing costs, catastrophic medical bills and a lack of job security — factors that have kept many Americans on the financial edge.
A May report from the Federal Reserve found that about 25% of American adults can’t cover all of their monthly bills, and 44% say they don’t have enough savings to cover an unexpected expense of $400. Nearly a quarter said they had paid an unexpected medical expense over the past year, and more than 40% of those — representing about 24 million Americans — said they were still paying debt related to those expenses.
That’s why lenders say their products are needed to help cash-strapped Americans make ends meet.
Consumer advocates say super-expensive debt is not the solution.
This gets to a central question: Should interest rates and underwriting be more closely regulated? Cracking down would probably mean fewer loans. But high demand could push borrowers to unregulated lenders, including those affiliated with Native American tribes. Tribal lenders argue that they are not subject to state lending laws and can charge whatever the market will bear.
“A lot of academics will say these loans should be illegal, but it’s not that simple. Some people who take out these loans say they’re glad they did. Others will say they wish these things didn’t exist,” said Servon, the University of Pennsylvania professor. “The million-dollar question is, is expensive credit better than no credit at all?”
For John Jeon, the answer was yes.
A year ago, he lost a seasonal job at a West Hollywood hotel and needed cash to pay rent and a medical bill.
With a poor credit score and limited options, he turned to Elevate.
He said he originally wanted only $1,500, but Elevate doesn’t offer loans that small and approved him for $3,000 at 224% APR.
The 28-year-old took it, thinking the extra money would give him time to find a steady job — which he eventually did as a manager of a Koreatown seafood restaurant. He also worked to pay off the loan two months early.
“The nature of this loan,” Jeon said, “it’s not good to be making minimum payments.”
Under new leadership installed by President Trump, the Consumer Financial Protection Bureau may seek to pull back new payday loan rules, dimming the prospects of federal guidelines for installment lenders.
In California, state lawmakers have had little success reining in high-cost lenders.
Last year, state Assemblyman Ash Kalra (D-San Jose) proposed a bill that would have capped interest rates at 24% for all loans of $2,500 or more, calling tripledigit APRs “an abusive practice.” Kalra later pulled the bill and co-authored another that would also have put a cap on rates for loans of more than $2,500 by expanding a state pilot program that now governs smaller loans.
That bill, too, stalled. A handful of lenders — including Elevate and Check ‘n Go parent Axcess Financial — and industry trade groups spent more than $300,000 on lobbying against those and other bills last year.
Kalra said he plans to try again.
“A whole bunch of profits are being made off the backs of poor and working-class families,” he said. “I think ultimately it comes down to the political will of the Legislature to stand up to these interests.”