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Our Economy Is a Sick Beast: The Corporate Debt Crisis Explained

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The coronavirus shutdown is hammering supply and demand across the globe. That has forced the real economy into a sharp recession and triggered a rolling financial crisis. Below is a primer on one key piece of this mess: the crisis in corporate debt markets. This branch of finance is vitally important because even healthy companies often need access to credit. If they do not get it, they go under.

In 2008, the vector of crisis ran from mortgage-backed securities to the rest of the financial sector and then to the real economy. This time, the real economy is being hit directly, and the damage is reverberating back into financial markets.  The failing markets, in feedback-loop fashion, further threaten the real economy as corporations find it harder to borrow. As the corporate debt markets sour, major companies will go bankrupt. Unemployment is skyrocketing. Some analysts expect the economy to contract by an annualized rate of 30 percent during the second quarter of 2020.

Already, US financial markets are on public life support. The Federal Reserve has committed to unlimited purchases of all sorts of assets: US Treasuries, mortgage-backed securities, car loans, municipal debts, and, in a historic step, both short term and long-term corporate debt. But the crisis will require more than a financial rescue.

“Like a hypertrophied organ rupturing, the putrefaction of unsustainable corporate debt now threatens to create a generalized economic sepsis that will hurt even healthy firms.”

The key political question now is: What sort of controls will come with the state intervention? Corporate greed and self-dealing need to be checked not merely in the name of fairness but also to make sure public bailout money is actually invested in the real economy rather than just gambled away, as it was after the 2008 crash and rescue.

The Rise of Corporate Debt

Since 2008, household debt levels have actually declined and are now lower than they were going into the last crash. But not corporate debt. Measured as a firm’s “net debt” compared to its EBITDA (earnings before interest, tax, depreciation, and amortization), corporate debt has doubled since the last crash. In 2009, the average American company owed $2 of debt for every $1 in earnings. Today, the average firm carries net debt to EBITDA of 3 to 1, and many firms — like Ford Motor, CarMax, Harley-Davidson, and General Motors — carry ratios ranging from 8 to 1, to as high as 15 to 1. Boeing, a special case because of its 737 MAX crisis, carries a ratio of 37 to 1.

Over the last two decades, corporate America’s credit rating has collapsed. In the early ’90s, more than sixty companies held AAA credit ratings. Today, only two US firms are AAA rated: Johnson & Johnson and Microsoft. In 2001, fewer than one in five “investment-grade” firms were rated BBB. Today half of all investment-grade corporate debt belongs to firms rated “triple-B” (BBB) or lower. A third of those firms are rated triple-B minus (BBB-), one notch away from speculative or “junk” status.

 

Already many triple-B-rated corporate bonds are trading on secondary markets at unusually low prices and high yields, often above 5 percent; that means even “investment grade” bonds are being treated as junk. Soon many triple-B-rated corporations will be formally downgraded to junk. That will drive up their borrowing costs and restrict their access to credit. Even healthy companies often need access to ready credit. If they do not get it, they go under.

The rating agency Moody’s estimates the default rate for “speculative-grade” debt — companies with ratings lower than Baa from Moody’s Investors Service, or a rating lower than BBB from Standard & Poor’s — might reach 10 percent this year, up from 2.3 percent last year. The consequences of all this will reverberate throughout the wider economy, deepening and extending the recession.

Total global corporate debt, including bonds and loans, is approximately $66 trillion; more than double what it was a decade ago. For comparison, the combined gross national product of all economies was estimated at $80.27 trillion in 2017. About a quarter of that is the US economy.

What They Did With the Money

After the 2008 crash, the world’s central banks, with the US Federal Reserve in the lead, spent the next decade pushing money into the financial markets by way of super-low interest rates and the direct public purchase of financial assets from the private sector via quantitative easing (QE).

The cheap credit encouraged lots of corporate borrowing in the form of loans from banks and massive issuance of corporate bonds. Unlike loans, which can be routinely extended, or sometimes abruptly terminated, or have interest rates that float up and down, corporate bonds are debt instruments issued by a company committing to repay borrowed money on a specified schedule at a specified, usually fixed, rate of interest.

Corporations have been borrowing for a variety of reasons that range from shrewd arbitrage to stupid and reckless asset stripping. For a struggling and unprofitable company, for example JCPenney, debt can be a lifeline. For a profitable firm, borrowing money can be a way to raise capital without diluting existing shareholders’ claim on the company’s profits, which would happen if the firm issued stock.

Even some profitable firms with piles of cash borrowed rather than spend their cash, in part for the firepower effect: letting other competitors and market entrants know that the firm has enough money on hand to buy out any threatening start-ups, and showing the world the firm is ready to ride out any economic crisis.

Some firms used their borrowed money to buy other firms. This helped fuel a post-2008 wave of mergers and acquisitions (M&As). Deloitte reported “more than $10 trillion in [M&A] domestic transactions since 2013.” Targeted companies borrowed to stockpile cash as a defense against such takeovers.

Firms also borrowed to fund CEO compensation, distributions to investors via dividends, and stock buybacks. Companies buy back their own stock so as to boost its price. A rising stock price is useful in many ways: it can keep away hostile raiders by making a targeted company too expensive to take over, but it can also draw in friendly suitors because (with some creative accounting) a rising stock value can make a weak firm appear more profitable. Corporate executives like a rising stock price because compensation packages are both tied to stock performance and almost always include some payment in company stock, so the higher the stock price, the higher the executives’ payout.

Sometimes, firms even invested their borrowed money in actual production. The capital-intensive oil and gas industry did that, but as we explain below, it still faces a crisis, perhaps more salient than other sectors

Bad Credit as Perverse Incentive

The end result of all the borrowing was declining corporate credit-worthiness: corporate debt soon badly outpaced their earnings growth and cash balances. This led to widespread credit-rating downgrades.

Perversely, lower credit ratings did not slow the borrowing binge, but rather spurred on further lending and borrowing, because as corporate credit ratings slipped, the interest rate that the downgraded firms had to pay on their loans and bonds increased. And, thus, so too did the lenders’ profits.

Corporate debt and stock prices entered into a twisted dialectic, each driving the other. As the stock market continued to inflate over the last decade, it provided the confidence investors required to continue their purchases of risky corporate bonds.

Keep in mind that many of the lending banks and asset funds were actually or essentially borrowing from Uncle Sam at inflation-adjusted rates close to zero, then lending to companies with triple-B and triple-B minus ratings at 5 percent interest. Profits like that meant there were always banks and asset funds eager to lend to debt-burdened corporations.

“Capitulation to the gluttony of financiers is deeply unjust. But it is also unworkable in purely technical terms. Without constraints on greed, there will be another bubble and crash and a longer slump, more suffering, greater inequality, and more social instability.”

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Investors could directly purchase specific corporations’ bonds, or, as is more often the case, invest in mutual funds or exchange-traded funds (ETFs) that target an array of corporate bonds. High-risk loans were also sliced and diced and repackaged into bundles called “collateralized loan obligations” (CLOs), a class of securities backed by an underlying portfolio of corporate loans.

 

According to the Federal Reserve Board of Governors, the majority of American CLOs are held by US institutional investors, including insurance companies, mutual funds, and depository institutions. This means that when the debt is unable to be serviced, the pain will be absorbed within the US economy, much of it by the unassuming customers of these financial behemoths.

As was the case with the mortgage-backed securities of the 2008 crash, these funds helped “distribute risk” and thus gave an appearance of safety. The logic was that owning 1 percent of a hundred different loans would be safer, even if some loans went bad, than owning the entirety of a single debt security. The logic is not entirely wrong. And that is part of the problem: it encouraged yet more lending. As long as the economic forecast was optimistic, there was no reason for the debt spree to let up.

Zombies and Others

Corporate debt, like much of the economy, is a story of disparities. Not every corporation is burdened by debt. Some firms are actually awash in cash. Microsoft, Berkshire Hathaway, Alphabet Inc, and Apple each sit on more than $100 billion in cash. As a whole, corporate America has been sitting on record amounts of cash in recent years. But at the same time, Morgan Stanley Investment Management estimates that one in six US companies cannot cover even the interest payments on their debts.

At the heart of the problem are “leveraged loans” and so-called zombie firms. Leveraged loans are a type of expensive, high-risk credit extended to already heavily indebted companies. Since the 2008 crash, the leveraged loan market has doubled to $1.2 trillion. Now, leveraged loans in the United States are being re-sold at only 84 cents on the dollar, their lowest price since August 2009. The majority of leveraged loans — more than half — are in the form of the aforementioned CLOs. In the fourth quarter of 2018, there were $617 billion of CLOs outstanding.

Zombie firms are defined by the Bank for International Settlements as heavily indebted, well-established companies that have failed to be profitable over an extended period and have low expected profitability in the future. In other words, heavily indebted start-ups do not qualify as zombies. The most threatened sectors are energy, automotive, insurance, capital goods (meaning equipment and machinery), telecoms, aerospace and defense, and some parts of retail.

The bull market of rising, often overvalued, stock prices allowed many uncompetitive and unprofitable companies to appear healthy based solely on their stock’s performance. Even before the markets started to crash on March 9, some analysts were prescient enough to call the market’s bluff at the beginning of the year.

But in this rapidly developing crisis, firms all across the economy may soon find it impossible to meet their liabilities. With the coronavirus breaking supply chains and forcing massive constrictions in consumer demand, corporate earnings are contracting fast, which in turn will badly hurt corporate debt servicing.

Like a hypertrophied organ rupturing, the putrefaction of unsustainable corporate debt now threatens to create a generalized economic sepsis that will hurt even healthy firms.

Profiles in Debt.

Airlines. The top six major US airlines spent enormous sums to buy back their stock over the last decade. US airlines (as a whole) spent 96 percent of their borrowed money on buying back stock. Now, revenue from flights is plummeting. United Airlines’ bookings have fallen by 70 percent. Back in 2011, American Airlines filed for Chapter 11 bankruptcy with $29 billion in liabilities; today, they have over $34 billion in debt. Yields on some of their bonds reached a whopping 12 percent, a particularly distressing sign as interest rates have been slashed by the Fed in an effort to relieve credit markets.

Energy. Even before the effects of coronavirus eviscerated demand for fossil fuels, US energy companies were suffering due to high fixed costs and low energy prices. In the last five years, 208 US energy companies have declared bankruptcy. Energy prices have been pushed down by the fracking revolution, the rise of renewable energy, and oil overproduction due to struggles between large producers like Saudi Arabia, Russia, and the United States.

“A replay of the 2008 bailout, which involved lots of public money but very little public regulation and planning, will only mean a long slump followed by a bubble for the rich.”

Now the coronavirus shock is pushing firms over the edge. Occidental Petroleum — which has $40 billion in debt, while its market value (the value of all of its stocks combined) is less than $11 billion — recently had its debt downgraded to junk.

Energy mutual funds reveal the crisis in the energy sector as a whole. Vanguard Energy Fund, considered one of the top four oil mutual funds, has lost over 41 percent of its value since the beginning of the year. Of course, the biggest oil companies, the “Oil Majors” (such as BP, Exxon Mobil, and Royal Dutch Shell) have enough resources, market power, and government support to survive the crisis. But the effects on the less established firms stretch beyond the energy industry itself.

Lenders. As the oil and gas firms go into crisis, the banks that extended them credit may also face defaults. Loans outstanding to the petroleum sector from regional banks in North America exceed $100 billion. Banks financing oil companies in Texas and Oklahoma saw their share prices drop nearly 30 percent. In oil-dependent states, public budgets will hurt as tax revenues decline sharply.

Retail. A number of important retailers carry net debt to EBITDA ratios that are too high to be sustainable under current conditions. For example, Rite Aid owes $15.80 for every dollar it earns. For JCPenney, the ratio is $8.30 to $1; for Walgreens Boots Alliance, it is $5.80 to $1. Office Depot owes $4.60 compared to every dollar earned

Beyond Bailout

Bailing out distressed companies, even taking them under public ownership for a while, may staunch the bleeding. And the bubble can eventually be reinflated with enough effort. But a replay of the 2008 bailout, which involved lots of public money but very little public regulation and planning, will only mean a long slump followed by a bubble for the rich.

The American economy is a sick beast. It needs not only government handouts and ownership — which it is getting — it also needs planning.

Oil, airlines, and cruise ships — these are high-emission industries that, in the face of climate crisis, must be radically transformed or cease to exist. With government ownership and planning, these industries could be unwound and their resources redeployed.

Although COVID-19 set off our current recession, it was the indulgence of the 1 percent built into the 2008 rescue that is responsible for the depth and severity of our current economic crisis. Without guidance, money was poured into the financial system. Not surprisingly, it blossomed alongside the mutually reinforcing dynamic of artificially inflated stock prices and ballooning corporate debt.

Capitulation to the gluttony of financiers is deeply unjust. But it is also unworkable in purely technical terms. Without constraints on greed, there will be another bubble and crash and a longer slump, more suffering, greater inequality, and more social instability. We have to force government to use its legal and financial power to steer the American economy toward more egalitarian, socially rational, and environmentally sustainable purposes. We have to make this bailout work for the majority of us.

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Inside the Highly Profitable and Secretive World of Payday Lenders

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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



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

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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.



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Bad Credit

Entrepreneur Tae Lee Finds Her Fortune

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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).

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