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> Posted by Center Staff
It’s common knowledge in the United States that the student loan situation is bad and getting worse, but what are the actual statistics and how severe is this trend? Like other kinds of debt, student debt has innumerable implications for young borrowers, as well as for the country’s recovering economy.
A new report from the New America Foundation inspects undergraduate student loan debt data from the past ten years, compiling borrower rates and amounts, in aggregate and by institution and degree type. The report, The Student Debt Review, draws from the National Postsecondary Student Aid Studies, a national survey series of student financial aid. Here are some of the report’s main findings:
- More students are indebted. Across all institution and degree types, the percentage of graduates with debt increased from 54 percent in 2004 to 62 percent in 2012. In 2004 there were 1.6 million graduates with debt. By 2012 there were 2.4 million.
- They owe more. Total student loan debt increased by an average of $3,300 between 2008 and 2012 after a period of four years in which it changed only marginally (2004-2008).
- For-profit colleges are a sore spot. Student debt is increasing especially quickly for bachelor’s degree recipients at private for-profit colleges, who now graduate with an average debt of $40,000 and pay $153 more each month than those graduating with bachelor’s degrees at public colleges. A very high proportion of the bachelor’s degree graduates at private for-profit colleges have borrowed (87 percent), compared to public colleges (64 percent).
> Posted by Laura Galindo and Alexandra Rizzi, Senior Associate and Deputy Director, the Smart Campaign
A few days ago a post on this blog detailed debt collections practices in the United States. The Smart Campaign, led by Jami Solli of Consumers International, is working to shed light on provider practices in microfinance through exploratory research in Peru, India, and Uganda.
Once a client becomes seriously delinquent and moves into default, the possibilities for serious consequences for the client arise. Yet little is known about how microfinance institutions treat clients at these later stages. What alternatives do providers offer to clients who are in protracted arrears? How are clients treated when they are defaulting on multiple loans? What do clients experience during this difficult and stressful stage? And after the default, are client debt obligations resolved? Is there a concerted effort to rehabilitate or re-include defaulters?
In September, the Smart Campaign kicked off a research project to explore what happens to clients who default. The project focuses on how microfinance practitioners treat defaulting clients. It is scanning for best practices around the world – like debt mediation projects in Europe and middle-income countries – and examining practices in detail through interviews with practitioners and regulators in Peru, India, and Uganda. Interviews were also conducted with credit bureaus, debt collections agencies, consumer advocacy/protection groups, and researchers specialized in those markets. These countries were chosen, in part, because of their variation in credit bureau infrastructure and the hypothesis that this would have significant impact on provider practices.
> Posted by Jeffrey Riecke, Communications Assistant, CFI
Thirty million Americans are currently being pursued by debt collectors. During 2012, the Federal Trade Commission (FTC) received 180,000 complaints about the practices of these companies – a 13 percent increase over 2000 levels and more FTC complaints than from any other industry. Troublesome practices seem to only be limited by the imagination, but some of the more reported-on ones are incessant calling at all hours and issuing unsubstantiated, misleading threats. Today the U.S. debt collection industry stands at over 4,500 companies and $12 billion.
To make matters worse, many of those being pursued don’t even have the debt in question. About one-quarter of the collection-related complaints the Consumer Financial Protection Bureau (CFPB) received last year were from individuals who were being wrongly pursued.
Debt collection happens, with some variation, in one of three ways: lenders carry out the collection in-house; third-party companies are hired and paid to complete the collection; or third-party companies buy a lender’s debt and independently complete the collection. In the latter case, collection companies buy individual’s debts from lenders for as low as a few cents for each dollar of debt and in return they receive a spreadsheet with basic information like names, phone numbers, and debt amounts. Collectors pocket the difference between what they paid to the lenders and the total they collect. It’s not uncommon for this spreadsheet information, intentionally or not, to be inaccurate or faulty. And even when a person is wrongly pursued, the consequences can be serious.
A popular debt collections practice brought to public attention in recent years thanks to legal suits centers on collectors taking debtors to court without their awareness (giving new meaning to the phrase blind judgment). Collections agents fail to serve a debtor a notice of complaint, produce a false affidavit claiming the individual has been properly served, and then proceed with a court hearing. The defendant, of course, does not attend, and so most often the debt collector wins the case and a default judgment is issued. (More than 95 percent of credit card lawsuits end in a default judgment, an automatic win for the collector or lender.) Such rulings could include the freezing of bank accounts, garnishing of wages, and they are very likely to reduce credit scores.
> Posted by Elisabeth Rhyne, Managing Director, CFI
The following post was originally published on the IFMR Trust Blog.
The Mor Committee Report offers a radical take on client protection, built around the concept of a legal right to suitability. After describing the recommendations briefly, I would like to tell IFMR’s readership why I’m excited about the approach (two big cheers), provide some thoughts on how to make it work (and how the Smart Campaign could assist), and raise a couple of questions.
Suitability is about ensuring that clients are sold financial services that are appropriate for their circumstances. A suitable product is one the client can be expected to manage with a low probability of serious hardship and a reasonable prospect that it will provide value. The concept has been present for some time in financial consumer protection regulation, most notably in the UK and Australia. The Mor Report proposes a unique approach to implementing suitability, which places responsibility on the service provider to install processes to ensure that clients are sold suitable products, e.g., client targeting and underwriting procedures that adequately assess repayment capacity. Regulation would hold the board of directors responsible for approving and overseeing the implementation of these processes, subject to external review. Hand in hand with this, the report recommends an energetic grievance redress system (which I will not address here), including both internal and external mechanisms to cope with individual problems.
The first big cheer goes to the decision to focus on suitability as the heart of client protection. This directs attention exactly where the greatest potential for harm occurs. Overindebtedness, is perhaps the greatest failure of suitability, resulting from selling loans that exceed a client’s debt threshold. This is why the Smart Campaign places Appropriate Product Design and Delivery and Prevention of Overindebtedness as Client Protection Principles #1 and #2, even ahead of Transparency. Among all the standard client protection problems, only overselling of credit has repeatedly caused sector-wide crisis and collapse, and thus if there is to be a focal point, this is the right one. (The report discusses the relative merits of suitability vs. disclosure as the core of consumer protection policy, which raises both practical and philosophical issues – an engaging topic for another day’s post.)
> Posted by Joshua Goldstein, Principal Director for Economic Citizenship & Disability Inclusion, CFI
Over the last two years, the Center for Financial Inclusion has worked to develop a series of tools and trainings (a how-to guide) for MFIs that have decided to become disability inclusive but don’t know how to do so.
Through our strategic partnership with Handicap International, Fundación Paraguaya, and the Smart Campaign, we have now completed a comprehensive toolkit. And today, we are pleased to announce that we are making these tools and trainings available to the industry in English, Spanish, and French on the Persons with Disabilities (PWD) page on the CFI website. Everything is open source and available to any MFI or other financial services provider that wishes to use the tools.
The Center made inclusion of PWD an institutional priority because at 15 percent of the global population, PWD represent a very large vulnerable minority, and are largely unbanked – no more than 0.5 percent of current MFI clients worldwide are PWD.
In its Responsible Treatment of Clients principle, the Smart Campaign emphasizes the importance of non-discrimination. As the Smart Campaign’s principles evolve, MFIs are encouraged to broaden their scope of services to minorities like PWD and promote equal opportunity to financial services.
The Convention on the Rights of Persons with Disabilities (2006) stipulates in Article 27 on Work and Employment that countries that have ratified the treaty must level the playing field so that persons with disabilities have an equal right to employment. The Center’s White Paper “A New Financial Access Frontier: People with Disabilities” made the case for disability inclusion, drawing on the approaches used around the world to guide implementation of the Convention. Now we present the industry with practical implementation guidelines for those institutions seeking to close the financial inclusion gap for persons with disabilities.
> Posted by Jeffrey Riecke, Communications Assistant, CFI
To combat high and rising national over-indebtedness levels, last month the South African Minister of Finance and Minister of Trade and Industry announced new steps the government will take to aid those entrapped in over-indebtedness and to prevent more individuals from befalling the same fate.
The actions follow the presidential cabinet the week prior authorizing the ministers to take action on the issue, as over-indebtedness has grown to be an alarming nationwide problem. The government enacted legislation in the last decade, including the Financial Advisory and Intermediary Services Act (2002) and the National Credit Act (2005), to protect clients and control for reckless lending. However, such industry aims have proven to be no easy task. The level of household indebtedness has increased from 50 percent of disposable income in 2003 to 76 percent in June 2013.
A few focus areas of the government’s forthcoming actions are enhancing lending controls, reviewing pricing caps, regulation of credit life insurance policies, regulations on debt-collection firms, relief for distressed borrowers, and improving the emolument attachment and garnishee orders system. Here’s the full list of planned measures shared in the government’s media release.
> Posted by Dave Grace, Managing Partner, Dave Grace & Associates
This week I received my self-addressed postcard from the Financial Inclusion 2020 Global Forum reminding me of my personal commitment to help ensure the safety of consumers’ savings and rights as they join the financial system. My first reaction was how slow the post is, but on deeper reflection I recognized that the postcard arrived just at a time when I needed a reminder of my commitment.
In addition to the new connections made at the Global Forum, two comments stood out for me; one was rooted in the past and the other in the future.
Remembering the Past
When Michel Khalaf from MetLife described the company’s roots as an insurer for the working class and the legions of agents who went door-to-door collecting weekly premiums of $.05 or $.10 and dispensing financial advice, I instantly understood something important about my grandfather. Until then, I had just thought of him as a MetLife agent in the steel belt towns of the northeastern U.S. in the 1920s and 1930s. He left school at age nine to help the family make ends meet when his own father prematurely passed away. He first worked shoulder-to-shoulder in the coal mines with many other immigrants. His math skills and ability to work across ethnic groups enabled him to leave the mines and become a top agent for MetLife. He knew firsthand how dangerous the mining work was and how a temporary or permanent injury could be a huge setback for these vulnerable families. Once the Great Depression hit and people could not access their deposits in banks, many of his clients turned to my grandfather for financial help. He had some liquidity and became a de facto deposit insurer, paying people what he could and in the process becoming a larger creditor of the illiquid banks.
Anticipating the Future
While Michel Khalaf’s comments helped me piece together my own family history, what stood out more was the collective prediction by attendees in London that the most important story in the next five years will be the presence of a “bank run” on mobile money.
> Posted by Center Staff
You’d be forgiven for not noticing, but last week, the CFI Blog published its 1,000th blog post. We started this blog in September 2008 in conjunction with the Center’s launch, as a forum for discussion, analysis, and even debate on the many issues facing financial inclusion. A lot has changed since 2008. The past few years have seen a shift in focus toward wider financial inclusion, moving beyond microcredit to include services such as savings and insurance. Technology, through mobile banking, big data, and other developments has made greatly expanded access to financial services. Client protection has become more firmly embedded into the microfinance industry. And yet, the quality of services and effective regulation continue to be as important as ever before. Going through our archives, you can see these shifts before your eyes. As this blog goes on, in addition to being a platform for sharing the latest developments and insight, it has become a historical record of how the microfinance industry has developed and changed.
This blog couldn’t be successful without the input of our many guest bloggers over the years who have leant their insight and expertise. If you ask us, it’s this range of outside expertise that makes this blog successful. We thank all of you who have written for us over the years and all of you who have shared your thoughts by commenting on our posts (5,557 comments and counting!).
Feel free to browse through our posts throughout the years via the “Archives” drop-down menu on the left-hand side. Here’s to the next 1,000!…
All-time most-read blog posts:
5 Great Books About Microfinance and How the Poor Use Money (August 23, 2011) by Yvonne Chen
5 Countries Where Microfinance Works (February 18, 2011)
Nicaraguan Microfinance in Crisis (November 5, 2009) by Sergio Guzmán
Interest Rates 101: APR vs. EIR (June 8, 2010) by Courtney Piper
Microfinance vs. Financial Inclusion: What’s the Difference? (February 27, 2013) by Susy Cheston and Larry Reed
> Posted by Calum Scott, Program Impact Director, Opportunity International
As a network of 40 microfinance institutions in 22 countries, Opportunity International is well positioned to play a powerful role in supporting the positive development of the microfinance industry. For client protection, we believe that the Smart Campaign’s Client Protection Certification represents the highest standard of assurance that an institution’s practices are responsible.
To promote client protection and certification among our network, we’ve engaged the support of MicroFinanza Rating – a specialized microfinance rating agency and one of the Smart Campaign’s licensed certifiers.
The agreement with MicroFinanza will facilitate our network partners to undergo certification missions, and promote the sharing of lessons learned from certification experiences across our network of institutions. This agreement also demonstrates our confidence in the quality of the work that MicroFinanza does.
> Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign
Over 165 investors and donors have endorsed the Smart Campaign and the Client Protection Principles. But our Campaign staff wanted to dig deeper: what does this support mean in practice? Are investors using the Client Protection Principles in their everyday work? How? Earlier this year, we embarked on a project to find out.
The Campaign worked with three Virtual Volunteers from Credit Suisse - Lloyd Yetton, Meha Jain, and Nicolas Vucekovic – to create a short survey aimed at understanding how investors incorporate client protection into their due diligence, post-investment monitoring, and reporting. The virtual volunteers spoke with representatives from 12 of the leading microfinance investors.¹ The findings, highlighted below, will help the Campaign shape its engagement with this pivotal stakeholder group.
Client Protection Universally Important But Not Uniformly Applied
All the investors interviewed stated that client protection was important to them from both a social perspective and for their bottom line. Most had seen first-hand the positive influence from strong client protection practices as well as the problems and instability that sprang up in their absence. Such universal recognition is an encouraging step forward from earlier days of the Campaign. In addition to understanding the importance of client protection, nearly all respondents said that client protection was already explicitly incorporated into due diligence. Investors are indeed scrutinizing a microfinance institution’s client protection practices before investing in it.