Connect with us

Bad Credit

Fed Consensus Goes AWOL As Monetary Policy Reinforcements Are Ordered

Published

on

(Source: Federal Reserve, caption by the Author)

The Fed has tried to downplay expectations for the November FOMC meeting, as being too early for any action to be taken under its new monetary policy framework. Unfortunately for the Fed, economic and political events are conspiring to force the FOMC’s hand. This could not have come at a worse time for the Fed, as there are signals that all its members are not on the same page when it comes to interpreting how the new monetary policy framework should be applied.

The recently released minutes of the last FOMC meeting revealed that opinion is widely dispersed on what exactly to do, although there is consensus to let inflation overshoot target and employment to be the best that it can be under the circumstances. This dispersion suggests that the Fed hasn’t quite come to grips with how to execute its new monetary policy framework.

Whilst the Fed fumbles around, for the right process and procedure, to finesse its new monetary policy framework, the US economy is showing signs of decelerating. A further headwind is being created by political uncertainty and the specific antics involved in the Presidential election campaign. This political headwind has also become economic as talks over a new fiscal stimulus have broken down.

The Fed’s time and space to get to grips with its new monetary policy framework are, thus, compressed and challenged respectively. Usually, these hurdles end in a volatile market event that then forces the Fed to react, rather than to act with foresight and prescience. This modus operandi seems to be happening again. The November FOMC meeting is, thus, becoming more significant than the Fed would like it to be in an election year. The FOMC would have liked to sit out the election, but events may conspire to force its hand against such better judgment.

(Source: Federal Reserve Board)

The latest Fed study of US Family Finances, from 2016 to 2019, showed that broadly measured, income and wealth disparities were narrowing before the COVID-19 pandemic struck.

(Source: Federal Reserve Board, caption Mathew 22:21)

Whatever may be said, about his current behavior and performance, President Trump can and surely will take credit for this pre-COVID narrowing of wealth disparities. The Democrats will claim that they are a trailing moving average from the Obama era. Since then, the disparities have widened. This widening is not just driven by the health impact of the COVID-19virus. It is also driven by the Fed’s own monetary policy response. The Fed is both a part of the problem and the solution.

(Source: the Author)

The Fed is clearly aware of its specific role in the widening of divisions in society and is keen to adopt a make-up strategy solution in line with the other make-up strategies in its new monetary policy framework. This remedial solution has been termed the Inclusivity Mandate by this author.

(Source: Federal Reserve Board, caption by the Author)

This author has characterized the US Economy as a “tale of two cities”, that are inhabited by the asset-rich and the asset-poor. The Fed’s response to the COVID-19 pandemic has been generally helpful to the asset-rich but has not really touched the asset-poor.

(Source: Reuters)

Evidently, Cleveland Fed president Loretta Mester also believes in this “tale of two cities”, since she has used the same analogy in her recent commentary. Her nuanced guidance suggests that the Fed will be more focused on the asset-poor going forward.

(Source: Atlanta Fed, caption by the Author)

A recent study of the labor market, from the Atlanta Fed, suggests that the employment situation is complex and far away from healing. The report also finds a “tale of two cities”, in essence. Temporary unemployment was hit the hardest, by the pandemic, but is recovering swiftly; even though it is a long-way off pre-pandemic level. Temporary layoff unemployment rose in the order of ten times that of the GFC experience. By contrast, permanent layoff unemployment did not get hit as hard, but neither is it recovering. Indeed, permanent layoff employment continues to deteriorate and is now about halfway back to the GFC peak.

The weak contractual safety in temporary work is clearly visible in the data. These workers didn’t get furloughed, they just got laid off the first because it was easy to do so for their employers. Temporary workers were not touched by the emergency support programs from the Fed. The strong recovery in temporary work may also be a symptom of the fact that it is cheaper to employ and easier to fire if things don’t play out well. The Gig Economy is clearly making quantum-leap progress in the economic recovery. The growth of the Gig Economy is a mixed blessing, that is better for the employer than the employee.

The weak contractual safety in temporary work is clearly visible in the data. These workers didn’t get furloughed, they just got laid off the first because it was easy to do so for their employers. Temporary workers were not touched by the emergency support programs from the Fed. The strong recovery in temporary work may also be a symptom of the fact that it is cheaper to employ and easier to fire if things don’t play out well. The Gig Economy is clearly making quantum-leap progress in the economic recovery. The growth of the Gig Economy is a mixed blessing, that is better for the employer than the employee.

The Fed’s pretensions, to be aiming for maximum permanent employment, could be in place for a decade.

It remains to be seen if the Gig Economy style improvement, in maximum temporary employment, can be achieved at the current pace.

The Fed cannot be happy with the ill-health of the permanent layoff unemployment data. Even if the Gig Economy gets temporary layoff employment back, to pre-pandemic levels, this will not be a cause for celebration; nor will it be a likely cause for the normalization of monetary by the Fed.

America’s labor market is inextricably broken and the returns to labor are under further erosion. This bodes ill for consumption. It also shows why the Fed is so keen to get the Federal Government to throw some more fiscal stimulus at the problem.

(Source: Boston Fed, caption by the Clash)

The temporary layoff workers are the basis of the asset-poor. They will also be joined by those who are getting permanently laid off on the rising trendline. To make things worse, since these folks are a bad credit risk, they are also punished by the credit creation process according to the Boston Fed.

The asset-poor is thus denied leverage and the chance to get out of the hole. The market has failed them and politicians, on both sides of the House, have abused them in order to get elected. The Fed now feels that it is time that they got a break before the US polity is divided further into something that can never be made whole again. This asset-poor cohort, who make up the growing contingent of the weak pricing power of labor, are the intended recipients of support under the Fed’s Inclusivity Mandate.

To frame the issue in terms of behavioral economics, the New York Fed has also found that, whilst both groups over-estimate their ability to avoid the COVID-19 virus, the asset-rich are over-confident relative to the asset-poor. Thus, whilst it is believed by both groups that the virus is someone else’s problem, the asset-poor do not believe this to be the case as strongly as the asset-rich. The real-life experience of the virus seems to have modified confidence. The virus has had a diverse impact on physical health, and the perception of physical health that is determined from the position of economic status.

This author believes that the focus on the asset-poor will come from the Fed’s positioning of the Community Reinvestment Act (CRA) as an unconventional monetary policy tool for its semi-official Inclusivity Mandate. This mandate was defined by Chairman Powell, in the Fed’s new monetary policy framework, as a commitment to “Inclusive” maximum employment.

The Fed’s focus on inclusivity is initially appearing as an abandonment of the asset-rich. This appearance has come as a great shock to Mr. Market since the Fed has fluffed its guidance in communicating this new emphasis. This garbled message, from the Fed, is in part due to its unwillingness to admit that it is part of the problem. Consequently, a risk-off sentiment from the asset-rich is threatening to become an economic headwind, that will also negatively impact the asset-poor, since it is being interpreted as a premature normalization of monetary policy per see.

(Source: bertrandrussellquotes)

The Fed may find that going forward, it will have to conflate the fortunes of the asset-poor and asset-rich more closely. Consequently, economic inequality will continue to widen. This is why the Fed Chairman is so insistent that a fiscal policy aimed at inequality is so critical. Unfortunately, for the Fed, the US presidential election is polarizing the debate between the asset-rich and asset-poor, which is negatively feeding back into the Fed’s ability to exclusively follow its Inclusivity Mandate.

Simply put, the Fed has too many, sometimes, conflicting missions. The US central bank is, thus, set-up for mediocre performance in achieving all its objectives. The new monetary policy framework is, therefore, inherently flawed from its inception. Elected policymakers’ failure to be inclusive, at the national level, just makes the situation worse. This is the curse of democracy in its present form. COVID-19 has simply put this dialectic into much sharper relief. As Churchill noted, however, this system is viewed as better than the alternatives; at least by some of those who make the rules and some of those who vote!

(Source: Gallup)

It should be noted that Churchill also said that Americans will always do the right thing after exhausting all the alternatives. The Fed and the American people, therefore, have to trust the democratic process and their Constitution, to deliver in the long run, maybe ultimately via the Supreme Court. But, as Keynes observed, in the long run, we are all dead anyway!

The last report discussed the growing disquiet amongst some Fed officials about the perceptions that it was stepping back from its commitment to provide further monetary policy stimulus to push inflation and employment to their targets. Boston Fed president Eric Rosengren was particularly concerned to correct this misconception. His concern has strengthened. In recent enhanced forward guidance, he admitted that “I’m (Rosengren) very worried that we’re pretty far away from what we think is maximum employment and I think there are going to be significant headwinds to getting there quickly.”

St. Louis Fed president James Bullard continues to be a thorn in the side of Chairman Powell and those others concerned about the growing perceptions that the Fed is stepping back. To be fair, Bullard has toned it down a little from his initial outburst that the economy may not need a further fiscal stimulus. Now he opines that ceteris paribus, GDP could return to 2019 levels quickly. Bullard resolutely continues to be a communication headache for Chairman Powell. His latest guidance continues to question whether another fiscal stimulus is needed this year.

(Source: the Author)

After Fed Governor Lael Brainard’s earlier signal, New York Fed president John Williams has recently re-confirmed that the Fed will pursue its Inclusivity Mandate, via the Community Reinvestment Act (CRA), whilst also re-affirming his commitment to the Black Lives Matter cause.

(Source and caption by the Author)

The last report discussed the general shocker of collective Fed guidance, post-recent FOMC meeting, specifically the howlers emitted by Chicago Fed president Charles Evans. So poor was Evans’ communication, that he felt or was physically compelled to redact it. His redaction was even more comical than his initial boo-boo. Apparently, when he first spoke, he thought that he was reading verbatim from the last FOMC statement, rather than any signal that the Fed would start normalizing monetary policy prematurely as initially understood. This answer is just not plausible, which is making Evans’ tenure on the FOMC untenable without some serious remedial guidance schooling. Evans is still in recovery mode, hastily trying to dovetail his own commentary with that of the new monetary policy framework’s overshooting bias themes. Apparently, now, Evans is “in it to win it”! In this monetary policy contortion, he confidently expects inflation to hit 2% and will then allow it to overshoot as far as 2.5%.

(Source and caption by the Author)

This Evans mess only serves to underline the observation that Chairman Powell should have changed the communication framework in addition to the monetary policy framework since extended forward guidance is an unconventional monetary policy tool after all. It also suggests that, as this author reasons, the Fed may still not yet understand how to translate the new monetary policy framework into guidance and words. Vae Mr. Market! Thus, the Fed and the next administration may have to overcompensate with monetary and fiscal policy vade mecum.

Although clearer than Evans, Philadelphia Fed president Patrick T. Harker’s guidance is riddled with plot-holes relating to assumptions and conditions. He remains cautiously optimistic. His optimism, however, assumes strict observance of COVID-19 healthcare protocols, a new vaccine by the spring, and also a fiscal stimulus well before then.

Somewhere, in the middle of the guidance spectrum, is to be found Philadelphia Fed president Patrick T. Harker. In this broad middle ground, Harker is able to support the Inclusivity Mandate, not just on moral grounds, but also because it boosts economic activity.

New York Fed president John Williams’s recent guidance was almost so vague that it almost had no practical value, other than to confirm that the Fed is committed to “purposefully” letting inflation overshoot “for some time”. To be fair, he did put a figure of three years on the time taken to reach full recovery that provided an indication as to how long “for some time” maybe. To give him the benefit of the doubt, he probably does not want to lock the Fed into any pre-commitments at this stage, which is fair enough. This view scans with Robert Kaplan’s reprise of his reason for dissenting at the last FOMC meeting.

For those who missed his previous explanation, Kaplan recently repeated that he wishes to give his colleagues some flexibility in the future; by allowing scope for a rate increase into the lexicon of guidance. Kaplan also showed that he is a good team player, by affirming his commitment to the Inclusivity Mandate in support of those who have been left behind by the Fed’s actions to date.

In an attempt to draw a line under the matter, Kaplan has changed the debate. He believes that Mr. Market should question his own faculties rather than the quality of Fed guidance. Apparently, the Fed has been very clear about where interest rates will be over the medium-term. Mr. Market should focus on this clear signal rather than waste his energies on second-guessing what he thought that he might have also heard.

At the other end of the dissenting guidance spectrum, Minneapolis Fed president Neel Kashkari is brandishing a “double-edged sword”. He foresees a “grinding recovery”, that is in need of further fiscal stimulus. His “double-edged sword” is derived from the fact that the healthcare protocols, which have been relaxed to boost the economic recovery, will deliver a blowback in the form of a pandemic spike. Kashkari, skillfully, used the weaker points in the latest Employment Situation report to underline his case and to loose the fateful lightning from his terrible “double-edged sword”. His truth and guidance are marching on!

To compound the Fed’s guidance misery, there is now evidence that its Main Street Lending Program (MLP) is not working either. The latest Senior Loan Officers Survey found that approximately half of the group had not used the MLP. Furthermore, the bankers claim that the program has not been utilized because its terms and conditions, set by the Fed, are too restrictive. This clearly explains while most Fed speakers (sans-Bullard) are crying out for more fiscal stimulus. Their cries will also, hopefully, distract observers from observing that the MLP has failed. Such an observation would not reflect well on the program’s administrator Boston Fed Governor Eric Rosengren. It is becoming clear that the program should be scrapped in its current form and replaced with something more impactful. Unfortunately, impactful means riskier lending. Only a central bank or Federal agency can take this increased risk.

Kansas City Fed president Esther George anticipated the bad news on the MLP. She presciently warned that the banking sector is still at risk from further poor loan performance. In such a weak state, it is no surprise that senior loan officers have not embraced the MLP wholeheartedly.

The banking sector which, in effect, is a stakeholder in the Fed is increasingly becoming an obstacle to monetary policy for the US central bank. The Fed’s restrictive terms for the MLP are in essence an attempt to preserve the stability of the banking sector so that it can continue to be a transmission mechanism for monetary policy. In this instance, the banks won’t lend and actually blame the Fed’s restrictive terms for not lending. Allegedly, the Fed is not trying to protect them but to put them (and the US Economy) out of business!

(Source: Cleveland Fed, caption by the Author)

A similar banking system obstacle can be found in the case of negative interest rates. The last report noted that, by many Fed rules of thumb, negative interest rates should have happened in America by now.

(Source: San Francisco Fed, caption by the Author)

A recent report by the San Francisco Fed sheds some light on why they have not seen NIRP. The researchers conclude that the compression of lending margins, by failure to pass on negative interest rates, undermines the banks’ ability to create credit and weakens their operations. If the Fed has not attempted negative interest rate policy, this is in part due to the power of the banking sector within the ownership and governance structure of the central bank. The banks don’t want NIRP and will do anything that they can to suppress it.

(Source: San Francisco Fed, caption by the Author)

The San Francisco Fed’s first report was supported with a more detailed technical exposition on the transition mechanism and the impacts on it from negative interest rate policy by central banks.

Negative interest rates are, clearly, a conundrum that the Fed and the US commercial banks have not yet come to terms with. Nor does it seem that they have any intention of positively coming to terms with negative interest rates any time in the foreseeable future. Clearly, also, the San Francisco Fed is interested in the matter and (clearly) its concern is a signal that the Fed and the banks too are concerned.

It is becoming clear that the banks want the Fed to continue its current policies, which favor the asset-rich and hence the banks’ loan portfolios. The banks are one of the biggest obstacles to the Fed’s Inclusivity Mandate by their aversion to the MLP. They have increased the obstacle in size, by refusing to even practically test if NIRP is the headwind that they say it is. They may, thus, be one of the biggest obstacles to the monetary policy transmission mechanism.

(Source: Federal Reserve Board, caption by the Author)

The Fed is toughening its stance, with the banks, however. Most recently, the cap on bank dividend payments has been extended to year-end.

Firstly, this dividend cap extension stops the banks from using the Fed’s emergency liquidity to enrich their shareholders rather than transmitting it to the real economy. This may nudge the banks into reconsidering their attitude towards the MLP, but this is unlikely.

Secondly, the Fed has hinted to the banks that low interest rate pressure, perhaps even negative interest rate pressure despite what the San Francisco Fed says, is here to stay for much longer. US banks are, thus, being nudged to change their cozy parochial business models and cozy relationship with the Fed, in order to adjust to the new economic normal. The BOJ did the same thing after it had unleashed NIRP. The Fed is giving the banks a heads up and support in preparing for NIRP. The entitled banks are pushing back.

Bowman’s commentary bigged-up the Community Banking sector for doing the heavy lifting in the, so far, unspectacular performance of the MLP. Fed Governor Brainard then followed up on Bowman, with her own explanation of how the Fed is engineering a greater focus on the Community Reinvestment Act (CRA) and its delivery, via the community banks, to execute its Inclusivity Mandate. It is, therefore, logical to conclude that any further modifications and expansion of the MLP will be aimed at the Community Banks. In fact, it may be reasonable to say that the Community Banks will be the main mechanism for the MLP and Inclusivity Mandate. It would be ironic, but not entirely surprising if they were also chosen and supported in transmitting NIRP in the future.

(Source: Atlanta Fed, caption by the Author)

As expectations of a 25 basis point rate cut, by mid- December, fall towards a steady lower probability of a rate hike by the same amount, one should not, however, exclusively blame the commercial banks for obstructing NIRP.

The Fed’s own inflation mandated inertial guidance is, perhaps, the greatest obstruction to NIRP. It is, also, fair to say that this obstruction is reasonably based on empirical evidence. A recent report from the Cleveland Fed sheds some light on this subject matter. It also helps, in some way, to explain why the Cleveland Fed president Loretta Mester has been a historic monetary policy Hawk who has been forced to embrace the seemingly bizarre Dickensian guidance, about a “tale of two cities”, of late. It all comes down to how one measures inflation, it transpires.

(Source: Cleveland Fed, caption by the Author)

The Fed’s own inflation measure of the PCE has a headline and a median sub-measure. According to the report, the Headline PCE is volatile and overly influenced by energy and electronics goods prices. Currently, in the pandemic, these components have pushed the Headline PCE well below both the Median PCE and the Fed’s average inflation target.

Consequently, the Headline PCE is saying NIRP and the Median PCE is saying prepare to normalize. Who is right?

For the record, the Median PCE has been a more accurate historic measure of inflation than Headline PCE. This track record was, however, before COVID-19. It is not clear to anybody how much COVID-19 has changed things.

In the meantime, Fed judgment and guidance must span the divergent gap, between Headline and Median PCE, and try to remain credible at the same time. Failure to credibly span this gap can be reasonably expected. It does not mean that the Fed is doing anything wrong. It simply means that the Fed doesn’t really have a firm handle on where inflation is headed. Under such conditions, approving a new monetary policy framework, that has an innate inflation overshooting bias, is a risky thing to do. Faced with the COVID-19 reality, the Fed has been forced to throw a great deal of caution to the wind. Having, thus, gambled it is reasonable to expect the Fed to be circumspect about doubling down on the wager. It is, therefore, now clear why Robert Kaplan dissented and tried to give the FOMC some optionality to normalize swiftly.

All this being said, the Fed’s pandemic response has provided a great amount of liquidity upon which inflation can converge towards and overshoot its target. It is, therefore, no surprise that the Fed wishes to drag its heels and leave Congress to do the heavy lifting on economic stimulus. It will be no surprise, either, to see the Fed refraining from easing further and increasing the pressure for fiscal stimulus going forward. A tantalizing (and destructive) prospect of a game of bluff is, thus, being set-up between the Fed and Congress.

Under these conditions, it is also fair to say that bonds are very richly priced unless one believes in a total COVID-19 related disaster that calls for NIRP. Low bond yields are currently being capped by Fed buying. Any relaxation, of the pace of Fed-buying, would cause a sharp spike in yields. Barbell bond investing strategies, which involve TIPS, may become the best way to play out this divergence, between Headline and Median PCE, until the real path of inflation becomes clearer.

(Source: Federal Reserve Board, Morse Code signal by the Author)

Chairman Powell did his level best to avoid committing to a new round of bond-buying with his eloquent request for additional fiscal stimulus. This plaintive speech was consistent, with the overshooting monetary policy framework theme, that the threat of over-doing it with a fiscal stimulus is well worth the risk against doing nothing. Philadelphia Fed president Patrick T. Harker then underlined the request for the fiscal cavalry to come to the rescue. They needn’t have bothered after the Lazarus halo-effect, from the recuperating POTUS, shredded their guidance.

(Source: forexlive, caption by the Author)

COVID-19 Positive POTUS recalcitrantly ruled out any new fiscal stimulus until he wins the election. Even if he does not win, this means that there will be no new fiscal stimulus until a new administration is sworn in. All the recent Fed speakers’ baseline scenarios and guidance, which assume a fiscal stimulus, are, therefore, meaningless. The balance of risks is, thus, tilted to the downside and the pressure is on the Fed to gamble even further against its current better judgment. If the Fed gambles, and eases further, then the next fiscal stimulus is potentially the event that will stimulate the inflation rebound that the Fed says it wants to let overshoot but, in practice, is totally scared of.

Loretta Mester’s initial reaction to the fiscal stimulus news, clearly, showed that the Fed does not want to be drawn into easing again without the markets and/or the economy experiencing some pain. Her initial take is that the recovery is still on, but it will take longer without a fiscal stimulus. This would all have been well and good had not Chairman Powell been so plaintive about the need for stimulus and so brazen about being tolerant of economic overheating risks.

Since Chairman Powell nailed his colors to the wall, by saying that the risk of overheating is worth taking, he is, therefore, obliged to ease again; or risk looking like a hypocrite and thereby undermining the new monetary policy framework from inception.

Dissenting Minneapolis Fed president Neel Kashkari smells blood in the water and is circling for the kill at the November FOMC meeting. He sees “enormous consequences if we (the Fed) just let things go, and the downturn will end up being much, much worse.” The failure to enact a fiscal stimulus is his baseline, from which to wreak havoc at the meeting. Just to add to the pressure, on Chairman Powell, Kashkari has also opined that further monetary and fiscal policy stimulus, under current circumstances, does not add up to an increase in moral hazard risk per se. Bold words indeed.

New York Fed president John Williams can foresee trouble at the November FOMC meeting and is trying to provide a contingency with some remedial guidance. Rather than get tied down on method, indicators, and targets Williams has created the notional concept of a “guardrail” to define the nebulous concept of inflation target overshooting. He hopes that this is acceptable to his colleagues and Mr. Market so that the Fed retains the luxury and the option, to shoot from the hip, whilst it wrestles with its new monetary policy framework doctrine. Hope has never been a monetary policy tool. In the current environment, it is unlikely that Williams’s “guardrail” will hold against a strong market and/or economic impact.

Chicago Fed president Charles Evans is already procrastinating again; his default-setting when he wishes to put off the inevitable. For now, he believes that the FOMC can stand pat and hopes that this will still be the case come the November FOMC meeting. His procrastination signals that he is more worried that this will not be the case.

Robert Kaplan and Eric Rosengren have appeared to blink, although Kaplan is still far from happy about being arm-wrestled into easing again.

Kaplan stuttered that the Fed is capable of doing more, but that fiscal policy would deliver more bang for the buck. He also intimated that he will be “skeptical” about doing more QE, and hence that he will dissent if and when this decision is taken at the next FOMC meeting. His FOMC dissent may also be qualified with his insistence that language incorporating a taper, when the economic situation allows, accompanies further easing.

Eric Rosengren opined that it will be “tragic” if another fiscal stimulus is not agreed upon. In addition, Rosengren noted that most firms went into the pandemic with greater leverage which is now acting as a headwind. They both were resigned to the fate that another fiscal stimulus may have to wait until the new administration is sworn-in. The inference is that they would agree to a monetary policy stop-gap expansion to fill the void until the fiscal stimulus comes.

The November FOMC meeting is a long way away. Getting there is going to be volatile and tortuous.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



Source link

Continue Reading

Bad Credit

Inside the Highly Profitable and Secretive World of Payday Lenders

Published

on

Illustration by Sarah Maxwell, Folio Art

When Bridget Davis got started in the family’s payday lending business in 1996, there was just one Check ’n Go store in Cincinnati. She says she did it all: customer service, banking duties, even painting walls.

The company had been established two years earlier by her husband, Jared Davis, and was growing rapidly. There were 100 Check ’n Go locations by 1997, when Jared and Bridget (née Byrne) married and traveled the country together looking for more locations to open storefront outlets. They launched another 400 stores in 1998, mostly in strip malls and abandoned gas stations in low-income minority neighborhoods where the payday lending target market abounds. Bridget drove the supply truck and helped select locations and design the store layouts.

But Jared soon fired his wife for committing what may be the ultimate sin in the payday lending business: She forgave a customer’s debt. “A young woman came to pay her $20 interest payment,” Bridget wrote in court documents last year during divorce proceedings from Jared. “I pulled her file, calculated that she had already paid $320 to date on a principle [sic] loan of $100. I told her she was paid in full. [Jared] fired me, stating, ‘We are here to make money, not help customers manage theirs. If you can’t do that, you can’t work here.’ ”

Photograph by Brittany Dexter

It’s a business philosophy that pays well, especially if you’re charging fees and interest rates of 400 percent that can more than triple the amount of the loan in just five months—the typical time most payday borrowers need to repay their debt, says the Pew Charitable Trusts, a nonprofit organization focused on public policy. Cincinnati-based Check ’n Go now operates more than 1,100 locations in 25 states as well as an internet lending service with 24/7 access from the comfort of your own home, according to its website. Since its founding, the company has conducted more than 50 million transactions.

What the website doesn’t say is that many, if not most, of those transactions were for small loans of $50 to $500 to working people trying to scrape by and pay their bills. In most states—including Ohio, until it reformed its payday lending laws in 2019—borrowers typically fork over more than one-third of their paycheck to meet the deadline for repayment, usually in two weeks. To help guarantee repayment, borrowers turn over access to their checking account or deposit a check with the lender. In states that don’t offer protection, customers go back again and again to borrow more money from the same payday lender, typically up to 10 times, driving themselves into a debt trap that can lead to bankruptcy.

Jared and Bridget Davis are embroiled in a nasty court battle related to his 2019 divorce filing in Hamilton County Domestic Relations Court. Thousands of pages of filings and 433 docket entries by April 26 offer the public a rare glimpse into the business operations of Check ’n Go, one of Cincinnati’s largest privately-owned companies, as well as personal lifestyles funded by payday lending.

The company cleared $77 million in profit in 2018, a figure that dipped the following year to $55 million, according to an audit by Deloitte. That drop in revenue may have something to do with the payday lending reform laws and interest rate caps passed recently in Ohio as well as a growing number of other states.


The day-to-day business transactions that provide such profit are a depressing window into how those who live on the edge of financial security are often stuck with few options for improving their situations. If a borrower doesn’t repay or refinance his or her original loan, a lender like Check ’n Go deposits the guarantee check and lets it bounce, causing the borrower to incur charges for the bounced check and eventually lose his or her checking account, says Nick DiNardo, an attorney for the Legal Aid Society of Greater Cincinnati. After two missed payments, payday lenders usually turn over the debt to a collection agency. If the collection agency fails to collect the full amount of the original loan as well as all fees and interest, it goes to court to garnish the borrower’s wages.

That devastating experience is all too familiar to Anthony Smith, a 60-year-old Wyoming resident who says he was laid off from several management positions over a 20-year period. He turned to payday lenders as his credit rating dropped and soon found himself caught in a debt trap that took him years to escape.

Two things happened in 2019, Smith says, that turned around his financial fortunes. First, he found a stable manufacturing job with the Formica Company locally, and then he took his mother’s advice and opened a credit union account. GE Credit Union not only gave him a reasonable loan to pay off his $2,500 debt but also issued him his first credit card in a decade. “I had been a member [of the credit union] for just two months, and I had a credit rating of 520. Can you imagine?” he says. Smith says he is now debt-free for the first time in 10 years.

Consumer advocates say Check ’n Go is one of the biggest payday lending operations in the nation. But knowing its exact ranking is difficult because most payday lending companies, including Check ’n Go and its parent company CNG Holdings, are privately held and reluctant to disclose their finances.

Brothers Jared and David Davis own the majority of the company’s privately held stock. David bought into the company in 1995, but CNG got its game-changing infusion of capital from the brothers’ father, Allen Davis, who retired as CEO of then-Provident Bank in 1998. Allen sold off $37 million in stock options and essentially became CNG’s bank and consultant.

By 2005, however, the sons were part of a public court battle against their father. Allen accused Jared and David of treating his millions in CNG stock as compensation instead of a transfer from his ex-wife (and the brothers’ mother), sticking him with a $13 million tax bill. In turn, the brothers accused Allen of putting his mistress and his yacht captain on the company payroll, taking $1.2 million in fees without board approval, and leading the company into ventures that lost Check ’n Go a lot of money. Several years of legal fighting later, the IRS was still demanding its $13 million. CNG officials did not respond to requests for comment for this story.

Jared and David split $22 million in profit from CNG in 2018 and, according to the Deloitte audit, CNG’s balance sheet showed another $42 million that could be split between the two brothers in 2019. Jared, however, elected not to receive his $21 million distribution “in order to create this artificial financial crisis and shelter millions of dollars from an equitable split between us,” according to Bridget’s divorce filing.

Worse, she claims, Jared said they would be responsible for paying taxes out of their personal accounts rather than from CNG’s company earnings, making her personally responsible for half of the $5.5 million in taxes for 2019. She believes it wasn’t happenstance that $5.5 million was wired to Jared’s private bank account in December of that same year. Bridget has refused to sign the joint tax return, and Jared filed a complaint with the court saying a late tax filing would cost them $1 million in penalties and missed tax opportunities.

“For the duration of our marriage and to the present, Jared has full and complete control of all money paid to us from various investments we have made in addition to our main source of income, CNG,” Bridget wrote in her motion. She suspects that Jared, without her knowledge or consent, plowed the money for their taxes and from other sources of income into Black Diamond Group, the fund that invests in the Agave & Rye restaurant chain. Beyond the original restaurant opened in Covington in 2018, “they have opened four other locations in one year,” she wrote, including Louisville and Lexington. (The ninth location opened in Hamilton this spring.) Agave & Rye’s website touts its Mexican fare as “a chef-inspired take on the standard taco, elevating this simple food into something epic!”

In his response, Jared wrote, “We have very limited regular sources of income.” He says he isn’t receiving any additional distributions from CNG, the couple’s primary source of income, “and this is not within my control. The company has declared that we would not make any further distributions in 2020 given economic circumstances. This decision is based on a formula and is not discretionary.” Agave & Rye helped produce $645,000 in income for Black Diamond in 2020 but has paid out $890,000 in loans, he says. Through August 31, 2020, he wrote, the couple’s “expenses have exceeded income from all sources.”


The divorce case filings start slinging mud when the couple accuses each other of breaking up their 22-year marriage and finding new partners. Jared claims Bridget began an affair during their marriage with Brian Duncan, a contractor she employed through her house flipping business. Bridget, he says, paid Duncan’s company $75,000 in 2018 as well as giving him a personal gift of $70,000 that same year. Jared says she also bought Duncan at least one car and purchased a house for him near hers on Shawnee Run Road for $289,000, then loaned money to Duncan. Jared says Duncan has been late in repaying the note.

While Bridget says Duncan has been drug-free for several years, he has a rap sheet with Hamilton County courts from 2000 to 2017 that runs five pages long. It lists a half-dozen counts of drug abuse and drug possession, including heroin and possession of illegal drug paraphernalia; assaulting a police officer; stealing a Taser from a police officer; criminal damaging while being treated at UC Health; more than a dozen speeding and traffic violations; a half-dozen counts of driving with a suspended license; receiving stolen property; twice fleeing and resisting arrest; three counts of theft; two counts of forgery; and one count for passing bad checks.

Bridget has fired back that Jared not only is hiding his money from her but spending it lavishly on vacations, resorts, and high-end restaurants with his new girlfriend, Susanne Warner. Bridget says Jared gifted Warner with $40,000 without Bridget’s knowledge, then declared it on their joint tax return as a “contribution.” Bridget’s court filings include photocopies of social media posts of Jared and Warner globetrotting from summer 2019 to summer 2020: vacation at Beaver Creek Village in Avon, Colorado; cocktails at High Cotton in Charleston, South Carolina, and dinner at Melvyn’s Restaurant and Lounge in Palm Springs, California; getaways at resorts in Nashville and at a lakefront rental on Norris Lake ($600 per night); in the Bahamas at a Musha Cay private residence ($57,000 per night), at South Beach in Miami, and at a private beach at Fisher Island; in Mexico at Cabo San Lucas; in the U.S. Virgin Islands at Magen’s Bay and on a private yacht ($4,500 per night); in California at Desert Hot Springs, the Ritz-Carlton in Rancho Mirage, and Montage at Laguna Beach; and in the Bahamas at South Cottage ($2,175 per night).

For her part, Bridget has gone through some of the top lawyers in town faster than President Trump during an impeachment—six in all, two of whom she’s sued for malpractice. She sent four binders of evidence to the Ohio Supreme Court, asking for the recusal of Hamilton County Judge Amy Searcy and claiming Searcy was biased because of campaign donations from Jared and his companies. Rather than deal with the list of questions sent to her by Chief Justice Maureen O’Connor, Searcy stepped down. Two other judges have since stepped into the fray, and in March Bridget filed for a change of venue outside of Hamilton County, arguing she can’t get a fair trial in her hometown. At press time, a trial date had been set for June 28 in Hamilton County.

The poor-mouthing in the divorce case has reached heights of comic absurdity. Jared claims he’s “illiquid” because he didn’t get his distribution from CNG in 2019. Bridget has received debt collection notices for the nearly $21,000 owed on her American Express card and a $735 bill from Jewish Hospital. There’s no sign yet that anyone is coming to repossess her Porsche, which according to her filings has a $5,000 monthly payment. Each party has received $25,000 a month in living expenses, an amount later reduced to $15,000 under a temporary legal agreement while the divorce case is being sorted out. Court filings show that Jared’s net worth is almost $206 million and Bridget’s is $22.5 million.


In the early 1990s, Allen Davis was raising eyebrows at Provident Bank (later bought by National City), and not only because of his very unbanker-like look of beard, ponytail, and casual golf wear. He was leading the company into questionable subprime home loans for people with bad credit and a frequent-shopper program for merchants, though the bank’s charter barred him from getting involved in full-blown predatory lending practices. With guidance and funding from his father, Jared, at age 26, launched Check ’n Go in 1994 and became a pioneer in the payday lending industry. Jared and his family saw there were millions of Americans who didn’t have checking or savings accounts (“unbanked”) or an adequate credit rating (“underbanked”) but still needed loans to meet their everyday expenses. What those potential customers did have was a steady paycheck.

Conventional banks share a big part of the blame for the nation’s army of unbanked borrowers by imposing checking account fees and onerous penalties for bounced checks. In 2019, the Federal Deposit Insurance Corporation estimated there were 7.1 million U.S. households without a checking or savings account.

The Davises launched Check ’n Go on the pretext that it would “fill the gap” for people who occasionally needed to borrow money in a hurry—a service for those who couldn’t get a loan any other way. But consumer advocates say the real business model for payday lending isn’t a service at all. The majority of the industry’s revenue comes from repeat business by customers trapped in debt, not from borrowers looking for a quick, one-time fix for their financial troubles.

Ohio’s payday lending lobbyists got a strong hold on the state legislature in the late 1990s, and by 2018 Democratic gubernatorial candidate Richard Cordray could rightfully claim in a campaign ad that “Ohio’s [payday lending] laws are now the worst in the nation. Things have gotten so bad that it is legal to charge 594 percent interest on loans.” His statement was based on a 2014 study by the Pew Charitable Trusts.

The frustration for consumer advocates was that Ohioans had been trying to reform those laws since 2008, when voters overwhelmingly approved a ballot initiative placing a 28 percent cap on the interest of payday loans. But—surprise!—lenders simply registered as mortgage brokers, which enabled them to charge unlimited fees.

The Davis family and five other payday lending companies controlled 90 percent of the market back then, an express gravy train ripping through the poorest communities in Ohio. The predatory feeding frenzy, especially in Ohio’s hard-hit Rust Belt communities, prompted a 2017 column at The Daily Beast titled, “America’s Worst Subprime Lender: Jared Davis vs. Allan Jones?” (Jones is founder and CEO of Tennessee-based Check Into Cash.) In 2016 and 2017, consumer advocates mustered their forces again, and this time they weren’t allowing for loopholes. The Pew Charitable Trusts joined efforts with bipartisan lawmakers and Ohioans for Payday Loan Reform, a statewide coalition of faith, business, local government, and nonprofit organizations. Consumer advocates found a legislative champion in State Rep. Kyle Koehler, a Republican from Springfield.

It no doubt helped reform efforts that former Ohio Speaker of the House Cliff Rosenberger resigned in spring 2018 amid an FBI investigation into his cozy relationship with payday lenders. Rosenberger had taken frequent overseas trips—to destinations including France, Italy, Israel, and China—in the company of payday lending lobbyists. In April 2019, Ohio’s new lending law took effect and, since then, has been called a national model for payday lending reform that balances protections for borrowers, profits for lenders, and access to credit for the poor, according to the Pew Charitable Trusts. New prices in Ohio are three to four times lower for payday loans than before the law. Borrowers now have up to three months to repay their loans with no more than 6 percent of their paycheck. Pew estimates that the cost of borrowing $400 for three months dropped from $450 to $109, saving Ohioans at least $75 million a year. And despite claims that the reforms would eliminate access to credit, lenders currently operate in communities across the state and online. “The bipartisan success shows that if you set fair rules and enforce them, lenders play by them and there’s widespread access to credit,” says Gabe Kravitz, a consumer finance officer at the Pew Charitable Trusts.

Other states like Virginia, Kansas, and Michigan are following Ohio’s lead, Kravitz says. Some states, such as Nebraska, have even capped annual interest on payday loans. As a result, Pew researchers have seen a reduction in the number of storefront lending op­erations across the country. Even better, Kravitz says, there’s no evidence that borrowers are turning instead to online payday lending operations.

Cincinnati is one of five cities chosen for a grant to replicate the success of Boston Builds Credit, an ambitious effort that city launched in 2017 to provide credit counseling in poor and minority communities by training specialists at existing social service agencies. The program also encourages consumer partnerships with credit unions, banks, and insurance companies to offer small, manageable loans that can help the unbanked and underbanked improve their credit ratings. “Right now, local organizations are all kind of working in silos on the problem in Cincinnati,” says Todd Moore of the nonprofit credit counseling agency Trinity Debt Relief. Moore, who applied for the Boston grant, says he’s looking for an agency like United Way or Strive Cincinnati to lead the effort here.

Anthony Smith is thankful that he’s escaped the downward spiral of his payday loans, especially during the pandemic’s economic turmoil. “I’m blessed for every day I can get paid and have a job during these difficult times, just to be able to pay my bills and meet my responsibilities,” he says. “I’ve always kept a job, but until now I’ve had crappy credit. That doesn’t mean I’m a bad guy.”

Can others worth millions of dollars say the same?

Inside the Highly Profitable and Secretive World of Payday Lenders Source link Inside the Highly Profitable and Secretive World of Payday Lenders



Source link

Continue Reading

Bad Credit

What’s Questionable Credit and Can I Get a Car Loan With It?

Published

on

Questionable’s definition means that something’s quality is up for debate. If a lender says that your credit score is questionable, it’s likely that they mean it’s poor, or at the very least, they’re hesitant to approve you for vehicle financing. Here’s what most lenders consider questionable credit, and what auto loan options you may have.

Questionable Credit and Auto Lenders

Many auto lenders may consider questionable credit as a borrower with a credit score below 660. The credit score tiers as sorted by Experian the national credit bureau, are:

  • Super prime: 850 to 781
  • Prime: 780 to 661
  • Nonprime: 660 to 601
  • Subprime: 600 to 501
  • Deep subprime: 500 to 300

The nonprime credit tiers and below is when you start to get into bad credit territory and may struggle to meet the credit score requirements of traditional auto lenders.

This is because lenders are looking at your creditworthiness – your perceived ability to repay loans based on the information in your credit reports. Besides your actual credit score, there may be situations where the items in your credit reports are what’s making a lender question whether you’re a good candidate for an auto loan. These can include:

  • A past or active bankruptcy
  • A past or recent vehicle repossession
  • Recent missed/late payments
  • High credit card balances
  • No credit history

There are ways to get into an auto loan with questionable credit. Your options can change depending on what’s making your credit history questionable, though.

Questionable Credit Auto Loans

If your credit score is less than stellar, it may be time to look at these two lending options:

  • What Is Questionable Credit and Can I Get a Car Loan With It?Subprime financing – Done through special finance dealerships by third-party subprime lenders. These lenders can often assist with many unique credit situations, provided you can meet their requirements. A great option for new borrowers with thin files, situational bad credit, or consumers with older negative marks.
  • In-house financing – May not require a credit check, and is done through buy here pay here (BHPH) dealers. Typically, your income and down payment amount are the most important parts of eligibility. Auto loans without a credit check may not allow for credit repair and may come with a higher-than-average interest rate.

Both of these car loan options are typically available to borrowers with credit challenges. However, if you have more recent, serious delinquencies on your credit reports, a BHPH dealer may be for you. Most traditional and subprime lenders typically don’t approve financing for borrowers with a dismissed bankruptcy, a repossession less than a year old, or borrowers with multiple, recent missed/late payments.

Requirements of Bad Credit Car Loans

In many cases, your income and down payment size are the biggest factors in your overall eligibility for bad credit auto loans. Expect to need:

  • 30 days of recent computer-generated check stubs to prove you have around $1,500 to $2,500 of monthly gross income. Borrowers without W-2 income may need two to three years of professionally prepared tax returns.
  • A down payment of at least $1,000 or 10% of the vehicle’s selling price. BHPH dealers may require up to 20% of the car’s selling price.
  • Proof of residency in the form of a recent utility bill in your name.
  • Proof of a working phone (no prepaid phones), proven with a recent phone bill in your name.
  • A list of five to eight personal references with name, phone number, and address.
  • Valid driver’s license with the correct address, can’t be revoked, expired, or suspended.

Depending on your individual situation, you may need fewer or more items to apply for a bad credit auto loan. However, preparing these documents before you head to a dealership can speed up the process!

Ready to Get on the Road?

With questionable credit, finding a dealership that’s able to assist you with an auto loan is easier said than done. Here at Auto Credit Express, we want to get that done for you with our coast-to-coast network of special finance dealerships.

Complete our free auto loan request form and we’ll get right to work looking for a dealer in your local area that can assist with many tough credit situations.

(function(d, s, id){ var js, fjs = d.getElementsByTagName(s)[0]; if (d.getElementById(id)) {return;} js = d.createElement(s); js.id = id; js.src = "http://connect.facebook.net/en_US/sdk/debug.js"; fjs.parentNode.insertBefore(js, fjs); }(document, 'script', 'facebook-jssdk'));

Source link

Continue Reading

Bad Credit

Entrepreneur Tae Lee Finds Her Fortune

Published

on

By Jasmine Shaw
For The Birmingham Times

Birmingham native Tae Lee had plans last year to visit the continent of Africa, the South American country of Columbia, and the U.S. state of Texas.

“I was going to stay in each place for like four to six weeks, and then COVID-19 happened,” she said. “So, I just was like, ‘You know what, I’m just gonna go to Mexico and stay for six months.’”

Once home from Playa Del Carmen, located on Mexico’s Yucatán Peninsula, the 33-year-old entrepreneur put the final touches on “Game of Fortune: Win in Wealth or Lose in Debt,” a financial literacy card game for ages 10 and up.

“We created ‘Game of Fortune’ because we realized there was a gap in learning the fundamentals of money,” said Lee. “We go through life not knowing anything about money and then—‘Bam!’—real life hits. Credit, debt, and bills come at us quick!”

Lee believes the game “gives players a glimpse of real life” by using everyday scenarios to teach them how to make wiser financial decisions without having to waste their own money.

“I feel like [financial literacy] can be learned in ways other than somebody standing up and preaching it to you over and over again,” she said. “You can learn it in ways that are considered fun, as well.”

Which is why “we want the schools to buy it, so we can give students a fun way to learn about financial literacy,” she added.

Lee, also called the “Money Maximizer,” is an international best-selling financial author, speaker, coach, and trainer who is known for her financial literacy books, including “Never Go Broke (NGB): An Entrepreneur’s Guide to Money and Freedom” and the “NGB Money Success Planner High School Edition.” The Birmingham-based financial guru focuses on creating diverse streams of income in the tax, real estate, insurance, and finance industries.

For Lee, it’s about building generational wealth, not debt.

Indispensable Lessons

Lee got her first glance at entrepreneurial life as a child watching her mother, Valeria Robinson, run her commercial cleaning company, V’s Cleaning. Robinson retired in 2019.

“My grandmother had a cleaning service, too,” said Lee. “So, even though I didn’t start out as an entrepreneur, watching my mom and grandma do it taught me a lot.”

Lee grew up in Birmingham and attended Riley Elementary School, Midfield Middle School, and Huffman High School. She then went on to Jacksonville State University, in Jacksonville, Alabama, where she earned bachelor’s degree in physical education. She struggled to find a career in her field and became overwhelmed by student loans.

“My credit and stuff didn’t get bad until after college,” she said. “I was going through school and taking money, but nobody told me, ‘Oh, you’re gonna have to pay all of this back.’”

Before embarking on her extensive career in money management, Lee had not learned the indispensable lessons that she now shares with clients.

“‘Don’t have bad credit.’ That’s all I learned,” she remembers. “Financial literacy just wasn’t taught much. I learned the majority of my lessons as I aged.”

In an effort to ward off collection calls and raise her credit score, Lee researched tactics to strategically eliminate her debt.

“I knew I had to pay bills on time, and I couldn’t be late with payments,” she said.

Lee eventually began helping friends revamp their finances and opened NGB Inc. in 2017 to share fun, educational methods to help her clients build solid financial foundations.

“People were always coming to me like, ‘How do I invest in this?’ and ‘How do I do that?’ So, I said to myself, ‘You know what, people should be paying to pick your brain.’”

Legacy Building

While Lee enjoyed watching her clients reach milestones, like buying a new car with cash or making their first stock market investment, she was also designing “Game of Fortune” to teach the value of legacy building.

“The game gives players the knowledge to build generational wealth, not generational debt,” she said. “It gives you a glimpse of life, money, and what can truly happen if you mismanage your coins.”

Using index cards to create her first “Game of Fortune” sample deck, Lee filled each card with pertinent terms related to debt elimination and credit and wealth building. She then called on a few friends to help her work through the kinks.

Three of her good friends—Barbara Bratton, Daña Brown, and Sha Cannon—were just a few of the people that gave feedback on the sample deck.

“From there I met with Brandon Brooks, [owner of the Birmingham-based Brooks Realty Investments LLC], and four other financial advisors to fine-tune the definitions and game logistics,” Lee said.

Though Lee was unable to land a job in physical education after graduating from college, she now sees her career with NGB Inc. as life’s unexpected opportunity to teach on her own terms.

“Bartending and waitressing taught me that working for someone else was not for me,” she replied. “In order to get the life I always wanted, I had to create my own business.”

In her entrepreneurial pursuits, Lee strives to be an open-minded leader who embraces the need for flexibility.

“COVID-19 has shown me that in entrepreneurship you have to maneuver,” she said. “When life changes, sometimes your business will, too. You may have to change the path, but your ending goal can be the same.”

“Game of Fortune: Win in Wealth or Lose in Debt” is available and sold only on the “Game of Fortune” website: gameoffortune.money. To learn more about Tae Lee and Never Go Broke Inc., visit taelee.money and nevergobroke.money or email tae@taelee.money; you also can follow her on Facebook (https://www.facebook.com/nevergobrokeinc) and Instagram (@nevergobrokeinc).

Source link

Continue Reading

Trending