What the hell? Financing a Harley at 22 percent interest!

Steve Rhode, the Get Out of Debt Guy, answers questions from his blog-site readers about consumer complaints. A few days ago, a woman named Mary wrote Steve about a Harley Davidson motorcycle her husband bought and financed at an interest rate of 22 percent.

Mary asked Steve if it was legal to apply an entire monthly loan payment to interest just because the payment was a few days late. She also asked if her husband could simply return the motorbike.

Mr. Rhode gave her good advice.

First of all, he pointed out, most loan payments typically go primarily to interest in the early months of the repayment period. "This is especially true," Mr. Rhode added, "if the outstanding balance includes late fees that get added to the account balance.

Taking the Harley back to the dealer, Mr. Rhode advised, is usually a bad option because a voluntary repossession will lead Mary and her husband with a big bill. The couple could sell the bike but they would need to sell it for at least enough to cover what they owe or come with the difference between the sales price and what they owe. Otherwise, they could not get the title to transfer.

Rhode then went on to estimate what the Harley is going to cost Mary and her husband if they continue with their repayment plan. Assuming, they financed the bike with a 72-month note, monthly payments would be $628 a month for 72 months. When they paid off the note after six years, they would have made payments totally $45,000 to pay off a $25,000 purchase.

Since Mary and her husband seem willing to just to give the bike back to Harley, they obviously realize they made a bad deal. They would have been better off to have saved enough money for a hefty down payment so they could have taken out a smaller loan. And assuming they had good credit, they could have financed the bike with a credit card at a lower rate of interest.

Some people reading Mary's story might conclude that she and her husband made a bad decision and have no one to blame but themselves. But I disagree. In a fairer and more just economy, laws and regulations would have prohibited this very bad transaction.

People forget that not too long ago, states had usury laws that placed strict limits on the interest that could be charged for a consumer transaction. In the state where I practiced law, a statute limited the interest rate to 10.5 percent--less than half the rate that Mary and her husband were charged.

But the banks figured out how to base their operations in states that permitted very high interest rates. Remember sending those credit card payments to South Dakota or Delaware? Then, in 1978, the Supreme Court allowed out-of-state credit card companies to charge interest rates that were higher than the interest rate allowed in their customers' own states. (Pat Curry explains this in a 2010 essay.)

Even student-loan debtors can fall into the trap of paying high interest rates. I've read a couple of recent bankruptcy court decisions in which people refinanced their student loans at 9 percent--a hefty rate indeed when we consider that the interest rate on a 10-year treasury bond is less than 2.7 percent right now.

Tragically, millions of Americans are financing consumer transactions to purchase stuff they don't need or is virtually worthless. This is also true for people who take out student loans to attend for-profit colleges that are not providing students with fair value--or any value at all in many cases.

As the 2020 political season heats up, voters need to ask presidential candidates if they endorse legislation that would effectively regulate consumer transactions and the student-loan industry. If a candidate has nothing to say about the massive exploitation of ordinary Americans by the banks, the student-loan racket, and the consumer-finance industry, voters need to find someone else to vote for.

Photo credit: Harley Davidson

Minnesota Court of Appeals upholds fraud verdict against Minnesota School of Business and Globe University

Last month, the Minnesota Court of Appeals upheld a fraud verdict against Minnesota School of Business (MSB) and Globe University (Globe). This is the latest setback for MSB, which has experienced several regulatory and litigation woes in recent years.

2018: MSB/Globe University Lose a Fraud Suit in Minnesota Court of Appeals

In 2014, the  Minnesota Attorney General’s Office sued MSB and its sister school, Globe University, accusing the two schools of violating the Minnesota Consumer Fraud Act and the Uniform Deceptive Trade Practices Act. According to the Minnesota AG Lori Swanson, MSB/Globe  mislead prospective students to believe that the schools' four-year criminal-justice program would lead to a becoming police officer and that it's two-year criminal-justice program would lead to becoming a probation officer.

These programs were expensive, ranging from $39,000 to $78,000. As the Minnesota Attorney General's Office said in its recent press release, "As a result of the schools’ misrepresentations, many students were saddled with large amounts of student loan debt without the ability after graduation to obtain a job in their chosen career field of serving Minnesota’s citizens as police and probation officers."

After a 17-day trial, a Minnesota trial court ordered restitution for 15 students who testified they had been defrauded and approved a restitution program that would enable other students to file fraud claims as well. Under the trial court's order, these claimants "would receive a rebuttable presumption of harm and causation."

MSB and Global appealed this ruling, and last month, the Minnesota Court of Appeals approved part of the trial court's judgment but not all of it. The appellate court ruled that the 15 testifying students had adequately proved their injuries and causation under the Minnesota Consumer Fraud Act. Therefore the trial judge's restitution order for these 15 students was upheld.

On the other hand, the appellate court ruled that the state had not satisfied its burden of showing a causal nexus between MSB/Globe's representations and injury to students who had not testified at trial. Therefore, the trial court's restitution plan for other students was not approved by the appellate court.

2017: Minnesota Supreme Court rules MSB loaned student money at usurious interest rates 

Last month’s decision by the Minnesota Court of Appeals is MSB’s latest litigation setback. Last year, after a long, drawn-out lawsuit brought by the Minnesota Attorney General's Office, the Minnesota Supreme Court ruled that MSB had charged its students usurious interest rates and had loaned students money without having a valid lender's license.

According to the Minnesota Supreme Court, MSB had loaned students money at interest rates ranging from 14 to 18 percent. The students never saw this money; it went directly to the school to pay students' tuition and fees.

Minnesota has a usury law that caps interest rates at 8 percent unless the lender offers an open-end  credit plan. MSB had not loaned students money pursuant to an open-end credit plan, the Minnesota Supreme Court ruled; therefore its interest rates were usurious under state law. In addition, the court concluded, MSB was in the business of making loans and had loaned money to its students without having the required state license.

2016: MSB/Globe's Fraud Ruling Led Minnesota to Revoke MSB/Globe’s Authority to Operate

In September 2016, in the wake of the trial court's fraud ruling against MSB, Larry Pogemiller, Minnesota Commissioner of Higher Education, revoked MSB/Globe's authorization to operate in the state of Minnesota.   Last month's ruling by the Minnesota Court of Appeals, partly affirming the trial judge's fraud decision, would seem to vindicate Pogemiller's decision.

And then there was more bad news for MSB/Globe. In December 2016, The U.S. Department of Education revoked the two school's access to federal student-aid money, which provided the bulk of the schools' operating revenues.

Globe University Continues to Survive in Wisconsin

One might think that all this litigation and regulatory pressure would cause MSB and Globe to shut down completely; but--like a Timex watch, Globe University, at least, has kept on ticking. Broadview University, another for-profit school owned by the same people who own Globe and MSB, has purchased four Globe campuses in Wisconsin, and this purchase was approved by the Trump administration's Department of Education.

Jeanne Herrmann, Broadview's CEO, said claims against MSB/Globe were unfounded. “Whatever one may think of the motivations of the litigation in Minnesota, that state-specific allegation had and continues to have nothing to do with the school’s campuses outside of Minnesota, " Herrmann said in a written statement (as reported by Inside Higher Ed).

We'll Always Have Wisconsin!

So if you are a student who liked how you were treated in Minnesota by MSB or Globe, simply move to Wisconsin, where you can enroll at Broadview University, which is owned by the same nice folks who own MSB and Globe.  I’ll bet your credits will transfer, and you will enjoy the same friendly and professional service in Wisconsin that you got in Minnesota. You Betcha!

 References

Mark Brunswick. Globe U and Minn. School of Business must close, state says after fraud ruling. Star Tribune, September 9, 2016. 

Paul Fain. A Shuttered For-Profit Re-emerges. Inside Higher Education, August 9, 2017.

Christopher Magan. Globe U. and Minnesota School of Business to start closing campuses. Twin Cities Pioneer Press, December 21, 2016.

State of Minnesota v. Minnesota School of Business, A17-1740, 2018 Minn. App. LEXIS 277 (Minn. Ct. App. June 4, 2018).

State of Minnesota v. Minnesota School of Business, 899 N.W. 467 (Minn. 2017).

U.S. Department of Education. Globe University, Minnesota School of Business Denied Access to Federal Student Aid Dollars. U.S. Department of Education press release, December 6, 2016.

Borrowing money at interest: The root cause of the student loan crisis

Many people underestimate the magnitude of the student loan crisis because they forget that student-loan debtors are borrowing money at interest and that this interest gets added to the amount borrowed if the borrowers get behind on their payments.

Thus, when we read the published bankruptcy court opinions, we see debtor after debtor who is trying to discharge a debt that is two times or even three times the amount they orginially borrowed. For example, in In re Bene (2012), Donna Bene borrowed about $17,000 in the 1980s to finance an education that she never completed due to the fact she had to leave school to care for her aging parents. She was unable to make her loan payments, and by the time she filed for bankruptcy, the amount of her debt, including fees and accrued interest, was $56,000--three times the amount she originally borrowed!

The York Times, the Obama administration, and other fuzzy-minded liberals think that economic hardship deferments and income-based repayment plans (IBRPs) provide meaningful relief for overburdened student-loan borrowers, but they  are apparently ignoring the fact that interest accrues while people participate in these programs. People who obtain economic hardship deferments for a period of even three or four years will find the amount they owe has grown substantially. 

The case of In re Halverson illustrates this phenomenon. Mr. Halvserson obtained economic hardship deferments on his student loans for many years and was never in default. Nevertheless, by the time he filed for bankruptcy, when he was in his 60s, his $132,000 debt and grown to almost $300,000.

Likewise, people who participate in IBRPs and whose adjusted payments are less than the accruing interest on their loans will discover the amount they owe will grow over the years--not shrink--because the interest is piling up even though they are making regular payments.

The student-loan guarantee agencies, which are the creditors in student-loan bankruptcy cases, have been asking the bankruptcy courts to put debtors on 25-year IBRPs, which is just crazy.  Ms. Bene and Mr. Halverson would have both been in their 90s before completing their IBRPS had they been required to do so. Fortunately, the bankruptcy courts discharged their debts and did not make these unfortunate people go through such a heartless and fruitless exercise.

There was a time--in pre-Reformation Europe--when loaning money at interest was considered sinful. And not so long ago, the states had enforceable usury laws that put limits on the amount of interest that could be charged on a debt.   In the jurisdiction where I practiced law, a creditor could charge no more than 10.5 percent on most debts.  Today, however, banks and credit card agencies are virtually unrestricted in the amount of interest they can charge.

Dorothy Day, the greatest American Catholic of the 20th century and co-founder of the Catholic Worker movement, subscribed to the ancient Catholic doctrine on usury, and she refused to accept interest on money owed to the Catholic Worker.  In 1960, she famously returned interest on money owed the Catholic Worker by the City of New York. The City had bought a piece of property from the Catholic Worker for $68,700, but there was some delay in making payment. When the check arrived, it included an additional $3,579.39 in accrued interest.

Dorothy sent the interest money back to the City of New York with this explanation (Day, 1963, p. 191):

We are returning interest on the money we have recently received because we do not believe in "money-lending at interest." As Catholics we are acquainted with the early teaching of the Church. All the early Councils forbade it, declaring it reprehensible to make money by lending it out at interest . . . .

Today, unfortunately, American society runs on borrowed money.  Presently, our government is keeping interest rates low for the expressed purpose of encouraging people to buy and borrow more. And where has all this borrowing gotten us? Americans now owe trillions of dollars in debt, including $1 trillion in student-loan debt alone.  College tuition is now so high at both public and private colleges that students are forced to borrow in order to get an education.

There is no easy way back from the abyss, but we can start by easing the burdens being borne by overstressed student-loan borrowers and by putting firm caps on college tuition costs.

References

Dorothy Day. Loaves and Fishes. Maryknoll, NY: Orbis Books, 1963.

In re Bene, 474 B.R. 56 (Bankr. W.D.N.Y. 2012).

In re Halverson, 401 B.R. 378 (Bankr. D. Minn. 2009).