Sea Change on the Lending Horizon


Batten down the hatches, a new type of loan is in the wind. We’re going to see a sea change.

If you’re not familiar with the term, Webster’s defines “sea change” as “a marked change: transformation <a sea change in public policy>.”

As an outspoken supporter of payday lending, I know that properly regulated, payday lending is a completely reasonable vehicle to provide credit to those who have been marginalized by banks or simply need the convenience of a virtually “instant” loan.

I also know that as financing vehicles go, payday loans have been more unjustly stigmatized than any other, which is saying a lot given our recent era of interest-only, no-income, no-assets, no-job (NINJA) loans and stealth $30 bank “overdraft privilege” fees.

Unfortunately, in the wake of the mortgage crisis, it’s time to recognize where the currents of public opinion are heading.

Even with the present need for credit at all levels, the unfair stigma against deferred presentment remains strong.

Curiously, that tide runs particularly high in states that have never been willing to adopt payday lending legislation.

Like it or not, it’s time to explore alternative horizons. Amid the current sea change, “small-dollar loans” are emerging as the vessel of choice — and everyone (from lender to legislator) needs to get aboard to make them a reality.

While working on this piece, I read over a Cheklist column I’d written back in the fall of 2004 titled, “Ending Payday Prohibition” — in which I called upon the states in the Northeast to change their legislative posture.

I wanted to see if the logic behind my thinking way back then can be applied to small-dollar loans today. I was happy to see that it most definitely can.

What I Said Then: Payday Lending Exists Everywhere

“We already have payday lending taking place in all of these allegedly protected states. In most cases, deferred presentment instruments are pitched via the Internet.”

Still true. What we don’t yet have is a properly regulated storefront alternative that gives working class folks ready-access to short and medium-term credit.

In the Northeast, and perhaps elsewhere, small-dollar loans are the answer.

What I Said Then: Credit Can be Abused by the Rich and the Poor

“Economic standing has no bearing on whether a consumer will be responsible or reckless in handling credit. Those with wealth sufficient to qualify for credit cards appear no less inclined to run up debt at double-digit interest than the non-credit-card-eligible are to let payday loan rollovers get away from them. And, with proper regulation, the latter scenario could be prevented.”

Still true. These words seem eerily prophetic in light of how the middle-class has since gorged itself on credit card lines and debt sourced through phantom home equity, and the how many sophisticated investors leveraged to the hilt to buy commercial real estate and stocks on margin.

What I Said Then: The Need Exists

“Demand in this country and elsewhere demonstrates that payday loans do address a financial need that is currently unmet where they are prohibited. “

Still true. But no matter how I felt then, and how I feel now, the payday lending industry is navigating some very rough waters.

Despite payday opponents’ reliance on one negative payday loan story out of 10,0000 (as if the same story does not exist for TENS OF MILLIONS of users of credit cards, overdraft privileges and mortgage debt), they do have a following.

As a result, the real question is, what form of grassroots lending will evolve along side payday lending?

Everyone acknowledges that something needs to fill the gap between traditional banking products (loans, credit lines and credit cards — which are not available to many typical payday borrowers and certainly not to the unbanked), and the underbelly of street lending, which in my day was known as loan sharking.

Will payday lending vanish? Absolutely not, because it fills a need and it works.

Will new forms of lending emerge? They already are doing so.

Richard Kelsky is co-founder and President of TellerMetrix, Inc. a New Jersey-based provider of POS software and systems to check cashers, payday lenders and retail banks. He is also a New York and Connecticut Bar member, a Polytechnic Institute of New York and New York Law School grad, a Certified Anti-Money Laundering Specialist and a frequent lecturer on legal, compliance, and technology issues. He can be reached at

Lender Challenges Class Representative


The last thing most check cashers want to face is a class action lawsuit. The costs are high and the potential damages could be staggering.

Given the high stakes, it is understandable why nearly every aspect of the class action may need to be carefully examined, including the adequacy of the class representative.

A woman, whose first name was Brenda, filed a purported class action complaint against a payday loan company, alleging that the lender had charged her and other potential class members usurious interest, engaged in deceptive conduct in violation of the Deceptive Trade Practices Act, and violated a prior court approved settlement.

Brenda then filed a motion for class certification in an Arkansas circuit court.

The lender opposed the certification, arguing, among other things, that Brenda was an inadequate class representative because her untreated schizophrenia and other mental illnesses rendered her incapable of making decisions in the best interests of the class.

The lender also claimed that Brenda’s lack of damages, lack of participation in a prior court approved settlement and a lack of a contractual relationship with the lender undermined the class’s ability to enforce many of its claims and, therefore, created conflicts of interest between Brenda and the class.

Counters Claims

The attorney for the proposed class countered that Brenda was an adequate representative because she was an involved plaintiff, had appeared at a two day deposition, and was present at the class certification hearing.

Further, the attorney claimed that Brenda understood her duties as class representative and testified in her deposition that she was willing to spend her own money, and even mortgage her own house if necessary, to cover the costs of filing suit.

Brenda’s deposition testimony was submitted to the circuit court, but she did not testify.

The circuit court certified a class of all persons who had engaged in check cashing or deferred presentment transactions with the lender in Arkansas since February 2002. The order included several findings with respect to Brenda’s adequacy as a class representative.

The circuit court said there was no evidence that she was not competent or unable to fulfill the necessary duties as class representative.

It noted that she had displayed a significant level of interest in the action, had the ability to assist in decision making as to the conduct of the litigation, and that she had given her deposition in the case and appeared at the hearing on class certification.

Finally, the circuit court said there was no evidence of collusion or conflicting interests between the Brenda and members of the class.

Lender Appeals

The lender appealed the circuit court’s ruling to the Arkansas Supreme Court.

The lender claimed that the circuit court abused its discretion in granting the motion seeking class certification because Brenda was not an adequate class representative, was incapable of making decisions in the best interests of the class due to her untreated mental illness, and was not familiar with the basic facts of the lawsuit.

The lender also claimed that there was no evidence that Brenda comprehended her duties and responsibilities as a class representative and had conflicts of interest with the class.

The Arkansas Supreme Court first noted that circuit courts are given broad discretion in matters regarding class certification, and it would not reverse a circuit court’s decision to grant or deny class certification absent an abuse of discretion.

Arkansas rules, noted the Supreme Court, require that the representative parties and their counsel be able to adequately protect the interests of the class and impose three elements:

(1) the representative counsel must be qualified, experienced, and generally able to conduct the litigation;

(2) that there be no evidence of collusion or conflicting interest between the representative and the class; and

(3) the representative must display some minimal level of interest in the action, familiarity with the practices challenged, and ability to assist in decision making as to the conduct of the litigation.

Mental Illness

The lender argued that Brenda’s untreated mental illness rendered her incapable of making decisions in the best interests of the class.

Specifically, the lender claimed that Brenda’s admitted schizophrenia, anxiety and depression, coupled with her refusal to take the prescribed medication to treat those conditions, disqualified her as an adequate class representative.

It also claimed that she did not have the mental capacity to make sound decisions on behalf of the class or otherwise carry out the duties of a class representative.

The Supreme Court noted that Brenda stated that she began seeing a psychiatrist in 1995 and was diagnosed with schizophrenia. She said she was currently receiving mental health services from her family physician, including medication for depression and anxiety.

Brenda said that she had hallucinations for 20 years in which she sees people and hears voices that are not really there.

Other Evidence

The lender, in turn, pointed to additional evidence of Brenda’s inability to make decisions on behalf of the class.

The lender noted that she testified that she had transacted business with other check cashers and did not inform her husband, with whom she shared checking and savings accounts.

In addition, the lender pointed to Brenda’s deposition testimony where she admitted that she entered into an agreement with another check casher, despite her belief that the interest rate was usurious.

The lender further argued that, absent proper treatment, especially in light of her admitted hallucinations and continuing problems with mental illness, Brenda did not have the capacity to assist in making decisions that were in the best interests of the class as to the conduct of the litigation.

Further, her actions in entering into deferred presentment transactions with higher fees than the lenders after filing the lawsuit demonstrated that her mental illness impaired her judgment.

The Supreme Court pointed out that persons with limited intellect or mental handicaps can serve as representative plaintiffs in class actions and that Brenda’s mental illness did not automatically disqualify her from representing the class.

Here, said the Supreme Court, no medical reports were introduced indicating that Brenda might not be able to vigorously participate in the prosecution of a class action.

In fact, said the court, the lender made no attempt to introduce Brenda’s medical records nor did it call her to testify at the certification hearing.

The circuit court found that there was no evidence in the deposition testimony that she was not competent or unable to fulfill the necessary duties as class representative.

The Supreme Court said that the finding of the circuit court was not clearly erroneous.

Familiarity with Basic Facts of the Lawsuit

Next, the lender claimed that Brenda was an inadequate representative because she was not familiar with the basic facts of the lawsuit.

It pointed to Brenda’s deposition testimony where she was unaware of what kind of damages she was seeking and, specifically, whether she was seeking punitive damages or damages for emotional distress.

The lender also pointed to her deposition testimony, where she could not remember when she first started doing business with the lender or how many agreements she entered into with the company.

In addition, the lender said that Brenda did not know that she had sued two companies with which she never transacted business and that she believed that she sued individuals, even though she sued only companies.

It claimed that Brenda did not know whether she was seeking statewide or nationwide class certification or the time period at issue in the lawsuit.

Further, the lender argued that she did not know whether the lender’s conduct violated a prior court approved settlement or the DTPA, as alleged in the complaint.

In sum, the lender argued that Brenda was detached from her role as class representative and that compelled the reversal of the circuit court’s order certifying the class.

New Information Key to Keeping Best Customers

Director of Analytic Solutions, CL Verify Credit Solutions

In today’s shifting consumer economy, capturing and keeping the best customers demands the relentless pursuit and use of real-time information.

To quickly and accurately predict consumer performance, this information must constantly keep lenders updated about changes and trends in their customers’ financial profiles.

Rapid and frequent fluctuations in consumers’ credit worthiness is unique to short term lending. Those fluctuations often are not sufficiently profiled by a traditional evaluation of their credit history or simple score-based decision strategies.

As consumer demand for short-term, small-balance loans increases, lenders can safely use non-traditional credit and banking data to identify, capture and retain profitable customers.

At the same time, they can avoid troubled loans and boost approval rates for qualified applicants who might otherwise be declined.

Tough Decisions

However, deciding which new data sources to include in your decision strategy can appear to be a complicated and daunting task.

Adding to the complexity are the macro changes in consumer economic trends, including an all-time-high unemployment rate of 9.5 percent as reported by the United States Bureau of Labor and Statistics in October 2009, as well as increased bankruptcy filings and home foreclosures.

Yet many state and federal agencies, regulators and auditors openly support the use of new, objective information, particularly when reviewing the credit needs of banked but underserved consumers.

Research suggests the vast majority of short-term borrowers have at least three or more trade line records with one of the traditional credit bureaus. Yet the true credit risk profile of these applicants is unique by lender and cannot be accurately determined by traditional credit scoring.

Portfolio performance is driven by many factors, such as a lender’s target populations, acquisition and pricing practices, customer service and retention strategy, as well as recovery operations.

Underserved consumers are much more susceptible to macro-economic trends such as housing prices and unemployment trends, with the impact much more quickly reflected in their credit behavior and performance.

For these reasons, it is vitally important for lenders and financial services providers to continuously challenge their existing risk management strategies, understand their performance dynamics and adjust decisioning rules to allow for changes and trends in consumer behavior.

Testing, Incorporating New Information

Introducing new data into your portfolio management process starts with a commitment to continuous learning and improvement.

Since data is the backbone on which the entire account life cycle can be optimized, a robust, actionable approach to reporting information which leverages a sound data acquisition and retention infrastructure must be employed across all phases of the cycle.

This reporting provides disciplined, constant monitoring to capture the chronic variations of each customer’s performance. Reporting that is focused, efficient and effective ensures critical data is available for timely analysis.

Analysis of portfolio trend data, including an understanding of internal (marketing) and external (economic or competitive) business influences, will enable lenders to identify the primary contributing factors to changes in portfolio profitability, make adjustments accordingly and proactively drive changes to ensure lenders hit their targeted return on investment.

Non-traditional Credit Data

Near-prime credit profiles move in and out of credit worthiness twice as fast as prime borrowers. To apply an approve/decline strategy that manages the allocation of available lending capital and identifies lower-risk, more-profitable customers, lenders must consider a long-term view of the customer relationship.

Non-traditional credit performance data derived from near-prime application and reported loan data identifies high risk inquiry and loan activity, and can help decrease loan default rates and maximize profitability.

This unique, “quick turnaround” performance data helps address and keep pace with the rapid profile migration of short-term borrowers and other underserved consumers.

Real-time performance trends on short-term loan products allow lenders and financial services providers to quickly determine how to maximize profitability in new relationships and proactively control those that are not beneficial to their business strategy.