In The Headlines
Payday Lenders Race to Make Changes Ahead of New Regulations
Getting cash-strapped people into very expensive debt has been a good business for Matt Martorello. His company, Bellicose Capital, helps an American Indian tribe in Michigan run websites that offer small loans to the public at annualized interest rates as high as 780%. Bellicose has collected tens of millions of dollars, with the tribe keeping about 2% of the revenue, according to documents provided by a person involved in the deal. Now Martorello is selling Bellicose to the tribe for just $1.3 million upfront, plus as much as $300 million in future payments, depending on how the business does.
Martorello is not the only person in the high-cost-loan industry who seems to be eager to get out these days. Many are making drastic changes to their businesses, such as switching products or moving overseas. One possible reason: The Consumer Financial Protection Bureau (CFPB) is poised to release new regulations this year, after more than four years of studies. The agency, which has not finalized the details, says the rules will stop borrowers from taking out short-term loans they cannot afford and racking up fees week after week to buy more time. Lenders say the CFPB will kill off payday advances and similar loans, hurting borrowers with no other options. “The CFPB made it extraordinarily clear that the path they’re going down is going to eliminate the vast majority of payday lending,” says Ed Groshans, an analyst at Height Securities.
Payday loans are short-term advances, for which the borrower must write a check postdated for the next payday. The regulations will also cover similarly costly loans that allow payment over a longer period of time but still require borrowers to provide access to their bank accounts. Bellicose, which provides consulting services and is not a lender, specializes in these types of installment loans. So far, such lending has largely been regulated at the state level, and the rules have proved easy to get around. Many online companies made arrangements like the one between the Lac Vieux Desert Band of Lake Superior Chippewa Indians and Bellicose. Dubbed “rent-a-tribe” by critics, the deals allow companies to get around state laws that cap interest rates by claiming the tribes are not subject to those rules. Avoiding federal regulations, like those the CFPB will propose, is tougher. The Federal Trade Commission (FTC) already has won cases involving tribal payday lenders.
Some storefront-based lenders are not even waiting to see the final version of the federal rules before making major changes. The regulations will not cover pawnshops, so customers at EZCorp’s 522 U.S. stores now need to put up valuables such as jewelry or electronics to get emergency advances. The company stopped offering its EZMoney unsecured loans in July, citing an “increasingly challenging legislative and regulatory environment,” even though U.S. and Canadian loans generated $165 million in fees in 2014. Cash America International, which has 825 stores, is making a similar shift. Others are looking overseas. First Cash Financial Services, which closed 22 stores in Texas last year, bought 211 pawnshops in Mexico, Guatemala, and El Salvador in January. Online lender Enova International is opening divisions in Brazil and China.
Consumer advocates and even some religious leaders have railed against payday lenders since they came on the financial scene. Their argument is that the lenders prey on desperate people. The business “…relies on borrowers who are unable to repay the loan,” says Paul Leonard of the Center for Responsible Lending. What is supposed to be a two-week, $300 loan for a $45 fee ends up costing hundreds and hundreds of dollars. The industry says its terms are clear and it is helping customers who need money for emergencies. “Critics don’t appreciate the demand for the product,” says Dennis Shaul, Chief Executive Officer of the Community Financial Services Association of America, a lobbying group. “You’re never going to see a bumper sticker that says, ‘I’m in debt, and I use payday loans.’ ”
Payday lenders seemed to dodge a death sentence when the Dodd-Frank Act, which created the CFPB, specifically barred the agency from putting caps on interest rates, over the objections of Senators Bernie Sanders (D-Vt.), Sheldon Whitehouse (D-R.I.), and others. The first actions by Richard Cordray, its director, were targeted at credit card and mortgage lenders. Then the agency started studying the payday market. A 2013 report found that the median borrower took out 10 loans over the course of a year and spent $458 on fees. The next year, Cordray said he was concerned that too many were falling into “debt traps,” citing findings that some borrowers getting Social Security benefits were indebted year-round.
In March of 2015, the agency released a draft proposal for the payday industry. The main requirement is that lenders make sure that potential borrowers will have enough left over after other expenses to pay back their loans. It sounds like something anyone would ideally want to do, but payday lenders say many of their borrowers would not qualify. Economists hired by the industry lobbying group found that just 16% of stores would be profitable under the proposal. Shaul says the rules are a backdoor way to cap rates, since lenders that charge less than 36% are exempt from many of them. “If that final rule is still as objectionable, we would have no choice but to look at our legal options,” he says. Brian Lynn, president of a 26-store chain called LendingBear, puts it more starkly: “We would absolutely, positively have to close our doors.”
Robo-Advisors Challenge Banks’ Wealth Management Franchise
Over the last six years, a segment of financial technology that has received a lot of attention, and a fair share of controversy, is automated investment services, or what are frequently called robo-advisors. These technology-backed advisors are built on the premise that many of the activities that a Registered Investment Advisor performs can be replicated by advanced software. The companies promoting the technology promise lower costs, simplicity, and even the bonus of making investing “fun.”
Banks have been nervously watching wealthy clients flirt with these robo-advisors, and that is one reason the lenders are racing to release their own versions of the automated investing technology this year. Millennials and small investors are not the only ones using robo-advisors. A group that includes pioneers Wealthfront, Inc., and Betterment LLC, along with services provided by mutual-fund giants also use the technology, according to Kendra Thompson, an Accenture PLC Managing Director. At Charles Schwab Corp., about 15% of those in automated portfolios have at least $1 million at the company. “It’s real money moving,” Thompson said in an interview. “You’re seeing experimentation from people with much larger portfolios, where they’re taking a portion of their money and putting them in these offerings to try them out.”
Traditional brokerage firms including Morgan Stanley, Bank of America Corp., and Wells Fargo & Co., are under pressure to justify the fees they charge as the low-cost services gain acceptance. The banks, which collectively employ about 46,000 human advisors, will respond by developing tools based on artificial intelligence for their employees, as well as self-service channels for customers, Thompson said.
“Now that they’re starting to see the money move, it’s not taking very long for them to connect the dots and say, ‘Whatever I offer for a fee had better be better than what they’re offering for almost nothing,”’ Thompson said. Technology will “make advisors look smarter, better, stronger, and more on top of the ball.”
Robo-advisors using computer programs to provide investment advice online typically charge less than half the fees of traditional brokerages, which cost at least 1% of assets under management. The newer services will surge, managing as much as $2.2 trillion by 2020, according to consulting firm A.T. Kearney.
More than half of Betterment’s $3.3 billion of assets under management comes from people with more than $100,000 at the firm, according to spokeswoman Arielle Sobel. Wealthfront has more than a third of its almost $3 billion in assets in accounts requiring at least $100,000, according to spokeswoman Kate Wauck. Schwab, one of the first established investment firms to produce an automated product, attracted $5.3 billion to its offering in its first nine months, according to spokesman Michael Cianfrocca. Bank leaders, including Morgan Stanley Chief Executive Officer James Gorman and Wells Fargo Chief Financial Officer John Shrewsberry have said their firms must develop robo-advisors to complement their sales force.
Customers want both the slick technology and the ability to speak to a person, especially in volatile markets like now, Jay Welker, President of Wells Fargo’s private bank, said in an interview. Welker went on to say, “The robo-advisor is positive disruptor. We think of robo-advisors in terms of serving multi-generational families.”
The Good News Is . . .
- The Bureau of Labor Statistics reported that the unemployment rate fell to 4.9%, from 5%, as more people joined the workforce. That showed up in the participation rate, which rose slightly to 62.7% form 62.6%. Another highlight of the report was the 0.5% increase in average hourly wages or a 2.5% gain year over year. Nonfarm payrolls rose by 151,000. Job gains occurred in several industries, led by retail trade, food services, drinking places, healthcare, and manufacturing.
- Carlisle Companies, Inc., a global conglomerate serving the construction, electronics, mining, and agriculture industries, reported earnings of $1.24 per share, an increase of 51.3% over year earlier earnings of $0.81 per share. The firm’s earnings topped the consensus estimate of analysts by $0.13. The company reported revenues of $876.2 million, an increase of 10.9%. Management attributed the company’s results to strong sales growth in its Carlisle Construction Materials and Carlisle Interconnect Technologies groups.
- Abbott announced that it had agreed to acquire Alere for an expected $5.8 billion to enhance its diagnostics business. Alere makes point of care medical tests that can provide results in a matter of minutes. Alere, which was founded in 2001, said it delivered more than 1.4 billion tests last year, producing annual sales of $2.5 billion—half of that from the United States. The company provides tests for HIV, tuberculosis, malaria, and dengue, as well as the flu and strep. Abbott will pay $56 per common share of Alere, and it will assume or refinance $2.6 billion of Alere’s net debt.
- http://1.usa.gov/IOsIPK – Bureau of Labor Statistics
- http://cnb.cx/1gct3xa – CNBC
- http://bit.ly/1Q08ynj – Carlisle Companies, Inc.
- http://nyti.ms/1QYMlF2 – NY Times Dealbook
Guide to Survivorship Life Insurance Policies
Most people think of life insurance as only insuring a single life. However, there are policies that insure two lives and are frequently used as part of an estate plan. These are called Survivorship policies and are typically permanent policies that, depending on the insurer, might include whole, universal, index, or variable life policies. Survivorship policies can be an effective estate planning tool, but may not eliminate the need for individual coverage. It is important to consult your financial advisor to ensure that you establish an insurance plan which meets your overall goals.
How Survivorship Life Insurance policies work – A Survivorship or Second-to- Die life insurance policy is designed to insure two lives in one policy with one premium payment. The policy only pays a death benefit when the second of the two insured passes away. There is no death benefit paid upon the first death. If there is a need for liquidity at the first death, then having one or both of the insured purchase an individual term or permanent policy could make sense as well. For example, if there is a large age gap between the two insureds, such as in a second marriage.
Purchasing a Survivorship Life Insurance policy – Survivorship policies are usually purchased by married couples or individuals that have a valid reason for seeking the coverage. Otherwise, insurers may question the application for the coverage. One of the many reasons to consider a Survivorship policy is a lower premium. Since the cost per thousand dollars of death benefit is based upon the joint life expectancy of both parties, the premium can be significantly less than the cost of purchasing two individual policies. Also, in situations where one of the insured is younger and/or in good health and the other is older and/or has health issues, insurers will often issue a Survivorship policy at standard class or with a rating (an additional charge). Where, for example, if the unhealthy person applied for individual coverage, they would be highly rated or even uninsurable.
Who should own the policy – Like individual life insurance, Survivorship policies can have a level or increasing death benefit. The death benefit that passes to the named beneficiaries is income tax-free. If the policy is not owned by either insured and has not been transferred from their ownership within the past three years, then the death benefit will not be included in their taxable estate. To avoid inclusion in the insured’s taxable estate, it is common for Survivorship policies to be owned in an irrevocable life insurance trust (ILIT). The premium is gifted by the insured to the trust each year. However, the policy could also be owned by other family members. The risk of having the policy owned, for example, by your children, is that in the event of a divorce or lawsuit, the policy cash value and/or death benefit could be attached.
Reasons for buying a Survivorship life insurance policy – Survivorship policies are frequently purchased to:
- Provide liquidity to the executor of an estate, so assets do not have been sold off to pay federal and/or state estate taxes that are due within nine months of the insured’s death. (See also: How Life Insurance Can Help Reduce Estate Taxes.)
- Equalize inheritance between children. For example, if one child inherits an illiquid family business or property, the insurance proceeds can be distributed to the other children.
- Replace wealth spent during the insured’s lifetime. For example, deciding to self-fund long-term care expenses.
- Fund charitable contributions.
Riders for Survivorship life insurance policies – Depending on the insurer, Survivorship policies offer a number of riders (some free and some at an additional cost) that can be attached to the policy when issued including:
- An accelerated death benefit or long-term care rider which is triggered if certain events occur, such as being diagnosed with a terminal illness, and allows access to the death benefit while the insured is still alive. Some tax issues around this benefit are still unclear if the policy is owned in an Irrevocable Life Insurance Trust (ILIT) since a lien is placed on the death benefit, and the rider is triggered by the insured.
- Disability waiver of premium, if the insured is under a certain age, usually 55 or 60, when the policy is issued.
- A policy split option which allows the owner to split the policy death benefit into two separate individual insurance policies if certain triggering events occur, such as a divorce or changes to specified tax laws. The insured does not have to go through underwriting, and depending on how the new policies are issued, there could be tax implications.
- An estate protection rider that provides additional term life insurance if an ILIT has not been setup prior to the policy being issued and both insureds die within the first four policy years. The additional term life insurance helps offset the effect of federal and/or state estate taxes on the death benefit, keeping the original policy benefit intact.
- http://bit.ly/1miRmvm – insure.com
- http://bit.ly/1PFDBTq – Bankrate.com
- http://bit.ly/1QLAWqi – Investopedia
- http://bit.ly/1PFDKX2 – my-life-insured.com
- http://bit.ly/1X9p9ok – WealthManagement.com