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The seasons may change, but the grift stays the same for predatory payday lending. 

Whether it’s that small-time payday loan outfit in the asphalt strip mall down the street or an international holdings conglomerate, the business model is unfortunately familiar for millions of consumers: dupe the financially-underserved into debt traps and then wrangle them into refinancing multiple times, costing them thousands. 

And true to their name, the Consumer Financial Protection Bureau (CFPB) is now holding one such conglomerate accountable. 

In late August, the CFPB sued high-cost installment lender Heights Finance Holding Company, previously known as Southern Management Corporation and its subsidiaries (known conjointly as Southern) for the illegal practice of loan-churning that has harvested hundreds of millions in predatory loan costs and fees. 

The CFPB alleges Southern violated the Consumer Financial Protection Act’s UDAAP prohibition by “churning payment-stressed borrowers in fee-laden refinances.”

In its complaint, the CFPB describes Southern’s business model: 

Put payment-stressed borrowers in unaffordable refinances; when they fall behind on their payments, refinance them again and again; with each refinance, front-load collection of unearned interest and insurance premiums while harvesting a new round of upfront fees; and repeat this cycle for as long as possible.

Explained another way, such Heights subsidiaries as Covington Credit, Southern Finance, and Quick Credit identify and target the financially underserved experiencing difficulty repaying and aggressively push them to refinance their loan into as many thousands of unaffordable dollars as possible. 

By that specific predatory business model, the customer predictably falls into the manufactured loan-churning scheme (otherwise known as a debt trap) and is forced to “refinance”, or rollover, the loan multiple times. For many customers, the rollovers inevitably result in delinquency, resulting in potentially thousands in costs and fees.

The CFPB seeks to end Southern’s unlawful debt trap practices, to remedy those wrongs, and enforce a civil monetary penalty on Southern. 

“The CFPB is suing the Southern lending conglomerate for illegally churning loans and harvesting fees from their customers,” said CFPB Director Rohit Chopra. “What Southern sold as a financial lifeline was, in reality, pushing customers into financial quicksand.”

Operating over 250 brick-and-mortar storefront outfits in the historically vulnerable states of Texas, Oklahoma, Tennessee, Georgia, Alabama, and South Carolina, the CFPB complaint states that more than 70 percent of Southern’s portfolio is made up of refinanced loans with nearly 10 percent of Southern’s customers refinancing their loans 12 or more times.

Refinances in total produce 40 percent of Southern’s net revenue. 

Predatory Payday Lending
Photo: Mart Production | Pexels

Monstrous multinational motivations in predatory payday lending

For a complete list of allegations regarding Southern’s loan underwriting, sales, and servicing practices, go to CFPB’s newsroom page here or the Consumer Finance Monitor. But a couple of those disturbing practices merit a mention. 

The first unscrupulous practice shows that once the customer predictably becomes 14 or more days past due, Southern then engages in a systemic plan of action to induce them into refinancing the loan. Notices, or more accurately, “solicitations,” are then sent to customers mischaracterizing those past-due refinancing options as “fresh starts,” “solutions,” or “the best option” for reconciling delinquencies. In reality, for most of those customers, “refinancing” only exacerbates and prolongs the debt trap by increasing those loan costs and fees. Conveniently, Southern disallows partial payments or even the concept of extending due dates. 

The second practice involves internal company policies regarding Southern’s sales expectations. 

Southern’s incentive compensation programs reward employees who are most successful in convincing customers to refinance, and then penalize employees who “fail” to meet refinancing goals and threaten with negative consequences like working nighttime or weekend shifts. And the CFPB brought the receipts: the complaint includes several email communications sent by Southern supervisors to employees meant to motivate (intimidate?) them to refinance past-due customers.

Southern’s setup is, by its very design, intended to push their very own customers into a debilitating debt trap, increase their financial instability, and squeeze penalties and late penalties, loan costs, and manufactured fees out of people who had no financial security to begin with.

Nurture by nature with fintech CUSOs

According to the Center for American Progress, more than 50 percent of predatory payday lending customers defaulted on their loans, placing existing bank accounts at risk. Further, the customers could also have their debts sold to a collection agency or face court action. This is how payday lending vultures like Southern care for their customers. 

The credit union movement, however, represents the polar opposite of the Heights Financial Holding Corporation, Southern Management Corporation, its subsidiaries Covington Credit, Southern Finance, Quick Credit, or any other of the tens of names included in that multinational conglomerate.

Financial inclusion in a healthy, growth-oriented financial institution like your credit union is an operating philosophy that potential members in your community can depend on to help improve their lives. The nurturing combination of lower overall fees and APRs, higher savings rates, and the personalized approach to member service, financial counseling, and mentorship that makes the credit union movement singular in its approach to financial health and wellness in the United States.

Then add forward-thinking and innovative fintech tools that, rather than competing with your credit union in the financial services marketplace, you can partner with to enhance your in-house digital lending product line and save on costs. Even more, fintech provides another financial asset that further builds your members’ opportunities for improved savings, credit-building, and access to emergency funds when unexpected life events happen.

Rather than purposefully angle susceptible members into a debt trap, your cooperative can focus on building your underserved members’ financial health from the ground up. But to accomplish that, your staff needs forward-thinking financial tools to accompany your staff’s expert counsel and mentorship. 

By employing the fully-automated QCash digital small-dollar lending solution, you can help members in need evade the debilitating effects of predatory payday lending. By providing them this affordable and accessible digital lending tool, they can get their financial feet back underneath them by setting a firm financial foundation (possibly employing a debt consolidation program), then build a sturdy credit profile from which they can graduate to higher products and services that contribute revenue back into the cooperative.

These are high times for digital small-dollar lending in the credit union movement. The NCUA recently released their findings that credit unions issued $227 million in small-dollar loans in 2022 through the administration’s Payday Alternative Loan (PAL) program, flying by the previous record of $174 million in 2019. That’s a 30 percent increase! 

This year represents yet another opportunity for the credit union movement to continue its record-breaking run in small-dollar lending. From small towns and communities to city neighborhoods coast to coast, hardworking families and residents deserve a safe, affordable, and accessible lifeline to emergency funds without the fear of getting swindled by a multinational, multi-billion-dollar empire of grift concocting a plan to steal what’s left of your members’ bank accounts. 

Join the movement to bring growth and prosperity back into the American financial system for the underserved. For more info on QCash, continue to read the QCash blog, explore our product line, or follow us on LinkedIn and X (formerly Twitter).