Original Loan Research Articles

Payday Peonage: Thirteenth Amendment Implications In Payday Lending

During the recent economic downturn, payday lenders’ business and profits have soared while traditional banks have tightened up their lending practices and experienced plummeting stock values. Payday lenders thrive in depressed economic climates. They do so by making short term, high interest loans to the underclass, generally the poor in urban and immigrant communities who need money to meet basic needs and who are without the sophistication to properly assess the risks of payday loans. Members of the underclass, therefore, are especially vulnerable to and ideal targets for predatory practices and exploitive loans. As the underclass, almost by definition, do not have the resources to pay back payday loans, they must “rollover” the loans and must eventually owe exponentially more than the terms of their original loan. In effect, payday loans enrich lenders while perpetuating the limited economic and social position of the underclass. As a result, the payday lending industry must be regulated. This article argues that the Thirteenth Amendment of the United States Constitution – which formally ended slavery – is the proper vehicle for Congress to impose federal usury caps on payday loans. In order to make this case, this Article provides an overview of payday lending practices; describes the underclass; discusses the Thirteenth Amendment, including its ratification, judicial history, and modern development; and then applies the Thirteenth Amendment to payday lending and the underclass. Much has been written on the subject of payday lending practices, notably Professor Nathalie Martin’s work on the predatory nature of payday lenders. Yet, the Thirteenth Amendment implications of payday lending have not been addressed and little has been done to address the conditions faced by the underclass. This paper makes clear that the Thirteenth Amendment is triggered by payday lenders’ targeting of a vulnerable social and economic people and that the Amendment provides an appropriate avenue for regulating this particular industry.

Diagnostics of white‐collar crime prevention

Nguyen and Pontell’s (2010, this issue) article makes a strong case that white-collar crime played an important role in the origins of the global financial crisis; specifically, in waves of mortgage origination fraud. Particularly telling is the 2006 Federal Financial Crimes Enforcement Network (FinCEN) report of a 1,411% increase in mortgage-related suspicious activity reports between 1997 and 2005, 66% of which involved material misrepresentation or false documents. Then another 44% increase was reported between 2005 and 2006. The BasePoint Analytics (2007) analysis of 3 million loans, which indicated that 70% of early payment defaults had fraudulent misrepresentations on their original loan applications, was another early warning signal that the mortgage issue was a crime problem. These data also demonstrated that it was a consequential problem, as the loans with fraudulent misrepresentations were five times as likely to go into default. The Federal Bureau of Investigation began issuing public warnings in 2004, claiming that it was seeing a spike in mortgage fraud cases in the mid-2000s (Black, 2009). Even earlier than that, a more abstract early warning drew on the lessons of the history of the savings and loans debacle from Nguyen and Pontell and fellow scholars such as Bill Black (Black, 2005; Black, Calavita and Pontell, 1995; Calavita, Tillman, and Pontell, 1997; Tillman and Pontell, 1995). Of course, other layers of causation were found in the structures of the derivatives market, the bonus culture on Wall Street, the captured ratings agencies that failed to do their job, the structural imbalances of American indebtedness to China to pay for Chinese exports to the United States, and the defective quantitative risk models applied by the financial industry (Braithwaite, 2009; Johnson, 2009; Krugman, 2008; O’Brien, 2009; Partnoy, 2003). Yet Nguyen and Pontell’s (2010) emphasis on the proximate causes in mortgage fraud is well placed for two reasons. First, many other layers of causation are extremely hard to fix and

Individual Borrower and Regional Factors Contributing to Subprime and Prime Mortgage Delinquency and Default Rates: An Analysis by Origination Vintages and Projections for 2009

This study looks at the causes of the residential real estate and mortgage market collapse in terms of the delinquency and default experience of subprime, Alt-A and Prime mortgages at the individual borrower level in metropolitan (MSA) housing markets. It is recognized that not all high risk loans will become delinquent and/or default and so the study attempts to develop proxies of loan and borrower factors that indicate the profile of those loans and borrowers most likely to default taking into consideration the characteristics of the MSA housing markets. Consideration of the MSA characteristics is an attempt to address the question of why there occurred so many defaults during a period of no recession and a high rate of employment. To do this it is recognized that borrowers’ willingness to pay depends largely on their desire to be a home owner rather than an investor in a residential property. To capture this desire, variables from the Loan Performance data base on loan and borrower characteristics at the time of loan origination are used. This will develop a cross-section analysis of delinquency and default rates of residential, subprime, Alt-A and Prime mortgages. The hypotheses tested represent the effects of loan and borrower level characteristics and MSA economic factors, such as MSA employment growth, unemployment rate, household income and housing price changes and their volatility on the level of delinquency and default rates on mortgages of different types and differing origination dates (vintages). From a previous study (Hanweck 2008) that aggregated individual loan data to the MSA level, we found that loan and borrower level characteristics such as loan-to-value ratio weighted by original loan balances, the weighted proportion of loans that have no documentation or the borrowers’ weighted FICO score and MSA level economic factors such as employment growth and house price index rates of change are highly statistically significant and economically important in explaining MSA loan delinquency and default rates over the 359 MSAs for 2005 and 2006 vintages mortgages. Using the 2006 vintage parameters delinquency and default rates for the 2007 vintage loans were projected by MSA.The uniqueness of the proposed study, that the Q Group Research funding will permit, is that it will develop estimates of individual loan level conditional probabilities of borrowers moving from one payments’ status to another – current to 30-days delinquent to 90-days delinquent to 180-days delinquent to default, ROE or foreclosure. The data is from Loan Performance Corp. and is collected from securitizations on a monthly basis for the years 2004 to 2009. The results of this study can be used by investors to more efficiently value the conditional likelihood of default, expected losses due to default and portfolio retention, and potential recoveries from mortgage modifications or sale. The probability of severe delinquency or default within any specified period from a specified date can be estimated conditional on loan payment status, estimated LTV, other loan and borrower characteristics and metropolitan area economic conditions including house price trends.

Prohibitions on punishments in private contracts

Abstract In most contemporary economies loan contracts that mandate exclusionary penalties such as imprisonment or other non-pecuniary punishments for defaulting debtors are illegal, despite the fact that in some cases contracting parties might gain by being able to use them. A possible rationale for contracting restrictions of this type is that exclusion imposes negative externalities on individuals not party to the original loan contract. We explore the ability of such externalities to account for these restrictions. We contrast exclusion with enforceable collateral seizure, a widespread feature of developed financial systems. We also consider “behavioral” agents who underestimate their chances of being punished, and show that overconfidence of this type is a less compelling justification for restrictions on exclusionary punishments than is often argued.

Payday Loans, Uncertainty and Discounting: Explaining Patterns of Borrowing, Repayment, and Default

Ten million American households borrowed on payday loans in 2002. Typically, to receive two weeks of liquidity from these loans households paid annualized (compounded) interest rates over 7000%. Using an administrative dataset from a payday lender, we seek to explain demand-side behavior in the payday loan market. We estimate a structural dynamic programming model that includes standard features like liquidity constraints and stochastic income, and we also incorporate institutionally realistic payday loans, default opportunities, and generalizations of the discount function. Method of Simulated Moments estimates of the key parameters are identi…ed by two novel pieces of evidence. First, over half of payday borrowers default on a payday loan within one year of their …rst loans. Second, defaulting borrowers have on average already repaid or serviced …ve payday loans, making interest payments of 90% of their original loan’s principal. Such costly delay of default, we …nd, is most consistent with partially naive quasihyperbolic discounting, and we statistically reject nested benchmark alternatives.

Student loans repayment and recovery: international comparisons

Student loans schemes are in operation in more than seventy countries around the world. Most loans schemes benefit from sizeable built-in government subsidies and, in addition, are subject to repayment default and administrative costs that are not passed on to student borrowers. We probe two issues in this paper, for 44 loans schemes in 39 countries: how much of the original loan is an individual student required to repay (the “repayment ratio”) and what percentage of the total costs of loans schemes can the lending body expect to receive back in repayments (the “recovery ratio”)? The analysis shows considerable variation in the size of the repayment and recovery ratios across schemes. Moreover, many loans schemes exhibit sizeable built-in subsidies accruing to student borrowers—in over 40% of the schemes examined, the repayment ratio is 40% or less. Overall loans recovery is considerably lower. Policy implications of these findings are discussed together with a consideration of steps that may be taken to improve the financial outcome of loans schemes.

Student Loans Repayment and Recovery: International Comparisons

Student loans schemes are in operation in more than seventy countries around the world. Most loans schemes benefit from sizeable built-in government subsidies and, in addition, are subject to default and administrative costs that are not passed on to student borrowers. We probe two issues in this paper, for 44 loans schemes in 39 countries: how much of the original loan is an individual student required to repay (the repayment ratio) and what percentage of the total costs of loans schemes can the lending body expect to receive back in repayments (the ratio)? The analysis shows considerable variation in the size of the and recovery ratios across schemes. Moreover, many loans schemes exhibit sizeable built-in subsidies accruing to student borrowers – in over 40 percent of the schemes examined, the ratio is 40 percent or less. Overall loans recovery is considerably lower. Policy implications of these findings are discussed together with a consideration of steps that may be taken to improve the financial outcome of loans schemes.

Prepayment Behavior of Dutch Mortgagors: An Empirical Analysis

The suboptimal exercise of the prepayment option in a mortgage is relevant for mortgage pricing and the management of a mortgage portfolio. Construction of an accurate prepayment model requires quantification of driving factors such as seasoning, seasonality, refinance incentive and burnout. We focus on Dutch mortgages but also discuss the Dutch market in a European setting. Within the euro‐denominated MBS market, the Dutch market is often referred to as the benchmark market. In our application we include typical Dutch market and contract characteristics such as the annual penalty‐free prepayment of 10 to 20% of the original loan amount. We use loan‐level historical data on mortgages originated between January 1989 and June 1999 to estimate separate models for two popular redemption types: savings mortgages and interest‐only mortgages. In both models we allow for suboptimal prepayment behavior. The results clearly indicate that prepayment rates depend on interest rates and the age of the mortgage contract. Moreover, we find that burnout is an important element in describing the prepayment behavior of Dutch mortgagors.

Default rates in the syndicated bank loan market: A mortality analysis

The most fundamental aspect of credit risk models is the rating of the underlying assets and the associated expected and unexpected migration patterns. The most important migration is to default. While default rate empirical studies of corporate bonds are now commonplace, there has never been a study on the default rate in the corporate bank loan market. This paper assesses, for the first time, the default rate experience on large, syndicated bank loans. The results are stratified by original loan rating using a mortality rate framework for the 1991–1996 period. We find that the mortality rates on bank loans are remarkably similar to that of corporate bonds when measured cumulatively over the five-year period after issuance, but loan default rates appear to be considerably higher than bonds for the first two years after issuance. Since loans have an average effective maturity of under two years, this shorter maturity difference is of considerable relevance, especially if confirmed when our database will cover a longer sample period and more actual defaults. We do attempt to estimate the impact and bias on our results of the study's sample period which only covers the recent benign credit cycle in the US. Our results provide important new information for assessing the risk of corporate loans not only for bankers but also mutual fund investors and analysts of structured financial products, credit derivatives and credit insurance.

An analysis of risk classifications for residential mortgage loans

Aims to distinguish among different levels of default risk for residential mortgage loans and to examine the significant factors for the different levels of default risk. Classifies the sample into default and non‐default groups and analyses the original mortgage loan data by factor and cluster analyses based on borrower characteristics, property characteristics and microeconomic variables in order to derive risk classifications from various likelihoods of default. Furthermore, applies logit, probit and discriminant analyses to examine the significant factors for all three clusters. The empirical results show that the three clusters may be ranked as follows, in order of risk, from the least to greatest likelihood of default: the owner‐occupied housing buyer, invester group and young buyer clusters. In addition, the factor “borrower’s education level” has negative impact for all three clusters.

Bank capital requirements for securitized loan pools

This paper analyzes the riskiness of credit enhancements offered on securitized pools of commercial and industrial loans. It develops a technique for allocating capital to such credit enhancements, based on setting the expected value of the credit losses in excess of allocated capital equal to the expected value of losses beyond required capital on the original loan pool. The resulting capital allocations are compared with those derived from a more general, bank-wide capital decision-rule, as well as newly published agency proposals regarding capital for credit enhancements.

State Public Lending Practice and Industrial Real Estate Mortgage Default: The New York Experience

This study assesses the relationship between selected public lender practices, real estate net equity, and industrial mortgage loan default. Seven lending practices and three advance indicators of default are tested on a matched-pair data set drawn from the second-mortgage portfolio of the New York State Job Development Authority (NYJDA). Results show that bankruptcy and negative net equity are strongly associated with default among the study population. No relationship is found between the strength of original loan guarantees or the lending subsidy and default. Also, negative net equity, liens, and late junior mortgages are useful predictors of default 1 year prior to the event. The NYJDA and similar public lenders should consider systematic monitoring of net equity, liens, late junior mortgages, and current financial statements of loan guarantors.

STUDENT LOANS: AN EFFECTIVE INSTRUMENT FOR COST RECOVERY IN HIGHER EDUCATION?

Governments and universities have trouble reconciling the goal of keeping higher education widely accessible with the need to retrieve some of its costs from students. Student loans offer a plausible solution to the problem. But loan programs turn out in practice to have been a disappointing instrument of cost recovery: analysis of twenty-three programs found that students repay only a small portion of the value of the original loan. Subsidies, high default rates, and high administrative costs have eroded the value of repayments. Sometimes loan programs have proved as expensive as outright grants. This article argues that most loan programs could be reformed to improve financial effectiveness—through targeting, charging positive real interest rates, designing repayment plans to take account of the likely pattern of graduate earnings, and ensuring that the oversight institutions can and will collect. Or governments could explore alternative devices for cost recovery, such as a graduate tax. This approach levies a higher income tax rate on beneficiaries of government-subsidized higher education and thus preserves the idea, implicit in loan programs, of paying for education with future earnings. As part of an effective tax system, a graduate tax could bring in significantly more revenue than traditional loan programs.

The Interpretation of Market Discounts in Assessing Buy-Back Benefits: Comment on Dooley

IN TWO RECENT articles Michael Dooley (1988a,b) has provided important analyses of voluntary debt reduction techniques. His argument parallels the well-known Modigliani-Miller (M-M) proposition that the market valuation of a given probability distribution of returns will be unaffected by the composition of claims upon it. For country debt, this distribution is based on the assumption that the country only fails to maintain contractual loan service through inability to pay. This commitment, combined with the (realistic) assumption that full repayment on the contractual terms is highly improbable, effectively transforms the original loan contracts into equity claims on the country's net exports of goods and services (Dooley (1988a, p. 218)). If an efficiently operating secondary market in country debt instruments is assumed, this framework ensures that the country must be largely indifferent to debt buy-back schemes. If the buy-back is financed by a third-party benefactor, the benefit will accrue primarily to existing creditors through the enhanced market value of remaining claims to the (unchanged) payments stream (Dooley (1988a, p. 214)). Self-financed buy-backs, however, pre-empt resources from this stream and therefore leave market values substantially unaltered (Dooley (1988b, p. 717)). Although these results provide a valuable reference framework, they share with the M-M propositions the need for essential qualification before policy conclusions can be safely drawn. With other authors already referring to buy-backs as a creditors' "boondoggle," it is important that the limitations of the underlying analysis be emphasized (Bulow and Rogoff (1988)). The interpretation of market discounts is crucial in this connection.

DEVELOPMENTS IN SAVINGS AND LOAN ASSOCIATIONS, 1945-53

The Journal of FinanceVolume 9, Issue 3 p. 283-297 Original Article DEVELOPMENTS IN SAVINGS AND LOAN ASSOCIATIONS, 1945–53 Harold W. Torgerson, Harold W. Torgerson Northwestern UniversitySearch for more papers by this author Harold W. Torgerson, Harold W. Torgerson Northwestern UniversitySearch for more papers by this author First published: September 1954 https://doi.org/10.1111/j.1540-6261.1954.tb01231.xRead the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Volume9, Issue3September 1954Pages 283-297 RelatedInformation

Developments in Savings and Loan Associations, 1945-53

The Journal of FinanceVolume 9, Issue 3 p. 283-297 Original Article DEVELOPMENTS IN SAVINGS AND LOAN ASSOCIATIONS, 1945–53 Harold W. Torgerson, Harold W. Torgerson Northwestern UniversitySearch for more papers by this author Harold W. Torgerson, Harold W. Torgerson Northwestern UniversitySearch for more papers by this author First published: September 1954 https://doi.org/10.1111/j.1540-6261.1954.tb01231.xRead the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Volume9, Issue3September 1954Pages 283-297 RelatedInformation

International Bank for Reconstruction and Development

On January 16, 1950 the International Bank for Reconstruction and Development reported a net income for the six months ending December 31, 1949 of $6,672,667, as compared with $4,804,057 for the first six months of the preceding fiscal year. Gross income, exclusive of $2,709,416 transferred to the special reserve, amounted to $12,268,685, as compared with $10,291,345. Total administrative expenses for the six months ending December 31, 1949 were $2,171,506, as compared with $2,062,840 for the same period the preceding year. Disbursements on loans during the latter six months of 1949 amounted to $40,721,716, increasing the total to $567,012,730, as of December 31. During this same period the Bank made loan commitments of $94,045,000, increasing the total since the Bank began operations to $743,906,983, after making allowance for the cancellation by Luxembourg of $238,017 from its original loan contract of August 28, 1947.

International Bank for Reconstruction and Development

On May 25,1948, the International Bank for Reconstruction and Development announced that arrangements had been completed for the sale of an issue of 2½ per cent Swiss franc serial bonds, maturing in 1953 and 1954, with a total value of 17 million Swiss francs (approximately $4,000,000). The entire issue was purchased by the Bank for International Settlements, the proceeds to be made available to the Netherlands Government for the purposes of the loan granted it in August 1947. According to the Bank's announcement of the issue, the original loan agreement with the Netherlands would be adjusted to provide for repayment in Swiss francs in the amounts and on the dates corresponding to the maturities of the issue; the principal purpose of the sale was “to make currencies other than dollars available to the Bank for use in its lending operations.” As the first sale of Bank securities outside the United States, the Swiss franc issue was considered by Bank officials as a pilot issue foreshadowing future sales in order to replenish the Bank's reserves of foreign currencies.

Collection Tactics of Illegal Lenders

Every usury investigation calls attention to loan sharks' reprehensible collection methods. Newspapers report the more brutal cases: of a recalcitrant borrower beaten by thugs, or a victim committing robbery to get money to pay the loan shark whom he fears more than he does the law. Welfare workers tell of debt-ridden families going without necessities in order to meet the lenders' harsh and ceaseless demands. But these are the extremes. The run-of-the-mill collection methods are bad enough. Collection efforts of illegal lenders are most frequendy aimed at the borrower's fear of losing his job. The wage earner who lives from one payday to the next, depending on each day's earnings to support his family, dreads the insecurity and poverty that closely follows unemployment. That victim keeps paying the loan shark because he is afraid of being sued or having his employer notified that he is delinquent on a debt; through fear of garnishment and possibly losing his job because of the trouble garnishment proceedings would bring to his employer. Delinquent borrowers may be intimidated in other ways and kept in virtual bondage long after the original loan and lawful interest have been repaid. They may be afraid their credit will be jeopardized or that neighbors and friends will learn of their financial difficulties. On occasion, they may be frightened by threats of physical injury, or even of imprisonment for alleged criminal acts in connection with their borrowing. Many borrowers keep paying simply because they are ignorant of their rights. They believe the lenders' demands are legal. This belief is strengthened where lenders are known to use freely the lower courts. Borrowers may not know of tie-ups between some justice courts and loan sharks. They do not realize some justices will, for the fees involved, turn their courts into litde more than collection agencies preying upon the wage earner.