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Finance

Summary. Businesses receive money on a daily basis, and begin using and benefitting from that money immediately through investing and expanding the business. Employees however, typically wait a week, a month, or maybe more to receive their wages, benefits, and bonuses. During that time, the employees wages benefit someone else. The employee is working, but not receiving compensation for their labor. Depending on the circumstances for an employee, the timing of a personal investment or paying a bill on-time could result in hundreds of dollars saved or earned. For a nominal fee, Payday Loans and Cash Advances make it possible for employees to receive their wages as they earn them. Learn more by visiting the Payday Loans page on Wikipedia.

Choosing a Lending Institution. At the time of this report (22 November 2008), a Google Search on Payday Loans produces over 9.7 million results. It’s difficult for consumers to know what lending institution go choose. So, we’ve developed a selection system based on the Company Legitimacy Ranking Systemdeveloped by the Consumer Defense Resource Group. Surprisingly, most of the lending institutions in the top ten listings on Google don’t pass our selection system criteria.

• Poor Website Design. Does the institution’s website look like it was designed by a teenager? If so, don’t do business with them. An example would be FastCashOnline.com
• No Physical Address. On the Contact Us page of the website, does the institution offer an actual address of where they are located? If not, don’t do business with them. Examples would include:
  • ApexPaydayLoans.com
  • PersonalCashAdvance.com
  • USAQuickPayday.com
• Malicious Website Code. Has the “lending institution” website been identified by Google to contain malicious code designed to hack into your computer? If so, don’t do business with them. An example would be GrowingYourBusiness.net which is #9 out of 9.7 million listings which is a reminder that high Google rankings don’t necessarily mean a company is legitimate.
• Paid Listing. Does the lending institution show up in the Google results only as a paid advertiser at the top of the page or right hand column? Then their listing probably hasn’t been earned, it’s just been paid for. So, there’s no guarantee they are a good company.

Borrower Drawbacks. Those who live from paycheck to paycheck, may quickly find themselves living from payday loan to payday loan. When the benefits of taking out a payday loan do not exceed the costs (fees), then an employee will experience ongoing losses. The problem with habitual borrowing, is that over time an employee may spend hundreds of dollars on fees. For this reason, some institutions, such as US Bank, offer a cash advance on a monthly basis, but for no more than nine consecutive months. With US Bank, a borrower may pay $50 for a $500 one month loan. The high fees are somewhat justifiable. The administrative costs for managing loans can be fairly high. For larger loans, these costs can be absorbed through the interest rates charged. However, for smaller short-term loans, it make sense to charge a higher fee.

Borrower Advantages. For those who are living on limited financial resources, a payday loan may make sense in some scenarios. Below are a few examples.

• Car Repair. You’re tight on money. You need your car to get to work every day (to your three jobs). One day the car has a breakdown and stops running. The repairs will be more than you can afford until payday which is two weeks away. Public transportation is either unavailable or doesn’t meet your needs. If you take a cab to work for two weeks, you’ll pay $200 in fairs. If you get a cash advance, and have your car repaired, you’ll pay $50 in fees, but save $150 by avoiding cab rides.
• Income Delay. You run an auto detailing business. You’re tight on money and depending on a check to come in the mail that was promised to arrive on a certain day. Based on that, you promised the phone company you’d pay your bill by a certain date and they won’t allow an extension beyond that date. You depend on your phone for your income. If your phone is disconnected, you’ll need to pay a reconnection fee and you’ll lose about $1000 in income from lost/missed customer calls. If you get a cash advance, you’ll spend about the same money as if you paid a reconnect fee on the phone. The cash advance will help you keep your phone connected and earn the $1000 in income you might have lost.
• Credit Score. You’re tight on money. A bill is due. To this point, your credit has been fine. However, if you don’t pay a particular bill on time, you’ve been told that you’ll be reported as delinquent and this will mess up your credit history. You’ll also be charged a late fee and an overage fee. By paying a cash advance fee, you can keep your good credit rating, and be out less money than if you’d paid the late fees.
• Overdraft Fees. In reviewing your recent banking transitions you realize you made a mistake and have ten checks that will be coming through without having sufficient funds to cover them. The checks were for very small amounts – ten checks at $5 each. The overdraft fees could be $300 or more for the bank to “loan” you the $50 for a short time to cover the checks. Most banks charge about $30 per check for overdraft fees. This amounts to extreme usury, yet it is permitted. So, you’re better off paying $50 to get a cash advance that can cover those checks. A $50 payday loan fee is nothing compared to multiple overdraft fees.

Investor Earnings Potential. For an investor who loans out money for payday loans, earnings can be very good. As mentioned above, $500 loaned for one month can produce a $50 return. By the end of a year, that same $500 loaned out every month will produce $600 in interest for a total of $1100 by the end of the year. So, similarly, $500,000 by the end of a year would more than double to be 1.1 million dollars. For banks, this practice is very lucrative because they already have money — other people’s money deposited at the bank. They pay those people something like 2% annual interest while earning about 120% interest.

Feedback, Comments, Corrections, Suggestions. We welcome your feedback on how to improve this report. As time permits, we will review your submissions and make changes accordingly and/or list your comments here. Please let us know if it’s okay to use  your name (first name last initial) and if you’d like a link to your blog or website.

• Shop Around. “I work as a consultant in the banking industry and one of my key area of focus right now is the payday lending industry. Banks are starting to realize the profitability of small-dollar, short term lending build on a deferred presentment model (e.g. payday lending).  The good news for consumers is that they’re offering products at rates roughly half of what the payday lending currently is.  As more banks enter this market and with the incoming administration, I predict pricing is going to become even more competitive. If a reader is going to go down the payday lending road, I would encourage them to check what products their bank or credit union may offer before turning to a payday lender. US Bank, Wells Fargo, Fifth Third, and many credit unions are now offering short-term, small dollar loans that are paid with the next direct deposit to an account. Just as a comparison in costs, US Bank charges a fee of $10 per $100 borrowed. The average in the payday loan industry is $17 (although this varies widely by state). Unlike many of the payday lenders, most of the banks will also try to work with the consumer to try to prevent a cycle of dependency on the product.” Stephanie R., 23 November 2008

Finance

Summary. There are many companies around the world today that harm the environment, exploit workers, produce harmful products, and engage in generally unethical practices. Socially Responsible Investment funds have been created for investors who don’t want to invest money in such companies. Another advantage of Socially Responsible Investments is that they generally perform better than other investments. The book, The SRI Advantage, by Peter Camejo, explains this in detail.

Resources. Below are some resources for more information about socially responsible investing.

• CREF Social Choice – “The fund seeks a favorable long-term rate of return that tracks the investment performance of the U.S. stock market while giving special consideration to certain social criteria.” In 2006, Coke was removed as a fund because of intentionally marketing to children. More about this fund can be found below.
• FTSE4Good. “The FTSE4Good Index Series has been designed to measure the performance of companies that meet globally recognised corporate responsibility standards, and to facilitate investment in those companies.” The easiest way to understand FTSE4Good is to read the FTSE4Good Inclusion Criteria PDF Document.
• Kiva.org – “Kiva’s mission is to connect people through lending for the sake of alleviating poverty. Kiva is the world’s first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world. The people you see on Kiva’s site are real individuals in need of funding – not marketing material. When you browse entrepreneurs’ profiles on the site, choose someone to lend to, and then make a loan, you are helping a real person make great strides towards economic independence and improve life for themselves, their family, and their community. Throughout the course of the loan (usually 6-12 months), you can receive email journal updates and track repayments. Then, when you get your loan money back, you can relend to someone else in need.”
• MicroPlace.com – “A billion people around the world work hard every day to lift themselves out of poverty. They don’t want your charity. They want your investment. Invest today, earn a return, provide them with a livelihood.” Help provide micro-loans to help change lives.
• Parnassus Investments – “We were among the first firms that implemented the idea that an investment firm could generate solid investment returns by taking a disciplined approach to investing while also having a positive impact on society. We look for companies whose actions and products have a positive effect on the world. We look for companies that: respect the environment, treat their employees as partners, encourage diversity in the workplace, support the communities where they operate, and insist on ethical business dealings. While we encourage the positive factors of why to invest in a company, we also apply social screens and will not invest in companies that: manufacture alcohol or tobacco products, are involved with gambling, manufacture weapons, or generate electricity from nuclear power. Socially responsible investing does not mean sacrificing financial discipline. After applying our social criteria, we have a universe of socially responsible companies. We then select companies for our portfolio strictly based on our investment process. Just because a company has a positive benefit to society does not make it a good financial investment.”
• Sierra Club Funds – “The Sierra Club Stock Fund invests in the top investment candidates among the most environmentally and socially progressive mid- and large-cap U.S. companies, as determined by more than 20 separate environmental and social screens. We believe companies focused on environmental and social issues make the best corporate citizens, and by minimizing their environmental liabilities will provide maximum shareholder value over time.”
• Social Investment Forum – “The Social Investment Forum (SIF) is the only national membership association dedicated to advancing the concept, practice, and growth of socially and environmentally responsible investing (SRI). Our members integrate economic, environmental, social and governance factors into their investment decisions and SIF provides programs and resources to advance this work.”
• Vanguard FTSE Social Index Fund (VFTSX) – “The is a socially responsible fund that is overseen by FTSE4Good. For more information, read the FTSE4Good Inclusion Criteria PDF Document.”
• Wikipedia Socially Responsible Investing Page

College Retirement Equities Fund (CREF) Social Choice Account. For people able to invest in CREF, the Social Choice Account is a good option. The account is described in detail below [source: CREF Prospectus PDF file]:

The Social Choice Account utilizes KLD Research & Analytics, Inc. (“KLD”) to screen potential investments for the Account based on certain environmental, social and governance (“ESG”) criteria. The manner in which KLD undertakes its ESG evaluation has been updated. Therefore, the third, fourth and fifth full paragraphs on pages 28 and 29 of the Prospectus (which start with “Companies that are currently excluded…” and end with the paragraph that starts “The Corporate Governance and Social Responsibility Committee…”) should be replaced with the following language:

“Prior to being eligible for inclusion in the Account, companies are subject to a comprehensive ESG performance evaluation, consisting of numerous factors. The ESG evaluation process favors companies that are:

• Strong stewards of the environment;
• Devoted to serving local communities and society generally;
• Committed to high labor standards for their own employees and those in the supply chain;
• Dedicated to producing high-quality and safe products; and
• Managing their companies in an exemplary and ethical manner.

Examples of environmental assessment categories are management systems, types of products and services produced, natural resource use, effect on climate change, and waste and emissions. Social evaluation categories include the treatment of employees and suppliers and dealings with the community and society at large. Governance assessment categories include governance structure, business ethics, transparency and reporting, and response to shareholder resolutions.

Companies are subsequently ranked by industry sector peer group according to the ESG performance ratings. All companies must meet or exceed minimum ESG performance standards. For each industry sector, key ESG performance factors are identified and given more weight in the process. Concerns in one area do not automatically eliminate a company from potential inclusion in KLD’s indices or the Account. When ESG concerns exist, the process gives careful consideration to how companies address the risks and opportunities they face in the context of their sector or industry and relative to their peers.

The social and environmental impact of corporate activities related to the production and sale of alcohol, tobacco, military weapons, firearms, nuclear power and gambling products and services are quantified and incorporated into a company’s overall ESG performance assessment. While not automatically excluded from KLD’s indices or the Account, most companies involved in these industries are ineligible for inclusion in the Account due to their poor overall ESG performance relative to their industry sector peers.

The Corporate Governance and Social Responsibility Committee of CREF’s Board of Trustees provides guidance in deciding whether investments meet the social criteria. The Account will do its best to make sure that its investments meet the social criteria, but TCIM cannot guarantee that every holding will always do so. Even if an investment is not excluded by the social criteria, TCIM has the option of excluding the investment if it decides the investment is inappropriate. Consistent with its responsibilities, the Corporate Governance and Social Responsibility Committee will continue to evaluate the implications of any modifications KLD makes to its ESG evaluation process.”

Original Description of the CREF Social Choice Account. The language above replaced the original fund description which follows.

The Account primarily invests in companies that are screened by KLD research & Analytics, Inc. (“KLD”)1 to favor companies that meet or exceed the environmental, social and governance criteria described below. The equity portion of the Account includes both a domestic and a foreign equities portion. The domestic equity portion attempts to track the return of the U.S. stock market as represented by the Russell 3000® Index. The foreign equity portion of the Account attempts to track the return of developed foreign markets as represented by the MSCI EAFE®+ Canada Index.

The fixed-income portion of the Account seeks to track the returns and duration of the Lehman Brothers U.S. Aggregate Index. The corporate issuers held in this portion of the Account are also subject to the screening criteria of KLD.

The benchmark for the Social Choice Account is a composite index comprised of three unmanaged benchmarks: the Russell 3000® Index, the MSCIEAFE®+ Canada Index and the Lehman Brothers U.S. Aggregate Index. See “More About Benchmarks and Other Indices” below for more information about composite and other benchmarks. Companies that are currently excluded by KLD include:

• Companies that derive any revenues from the manufacture of alcohol or tobacco products, and retailers that derive significant revenues from the sale of alcohol or tobacco;
• Companies that derive any revenues from gambling;
• Companies that derive any revenue from the manufacture of firearms and/or ammunition, and retailers that derive significant revenues from the sale of firearms and/or ammunition;
• Companies that derive significant revenues from the production of military weapons; and
• Electric utilities that own interests in nuclear power plants.

The remaining companies are then evaluated for their records in certain qualitative areas. Concerns in one area do not automatically eliminate the company by KLD. Instead, KLD bases its screening decisions both on the company’s social performance in these areas relative to its industry peers, and the general social and environmental impact of the industries to which each company belongs. The following are some of the principal social criteria that KLD currently considers when screening companies:

• Safe and useful products, including a company’s record with respect to product safety, marketing practices, commitment to quality, and research and development;
• Employee relations, including a company’s record with respect to labor matters, workplace safety, employee benefit programs, and meaningful participation in company profits either through stock purchase or profit-sharing plans;
• Human rights, including relations with indigenous peoples, non-U.S. labor relations, and operations in countries that KLD considers to have widespread and well-documented labor rights abuses;
• Corporate citizenship, including a company’s record with respect to philanthropic activities, community relations, and impact of operations on communities;
• Corporate governance, including executive compensation, tax disputes, and accounting practices;
• Environmental performance, including a company’s record with respect to fines or penalties, waste disposal, toxic emissions, efforts in waste reduction and emissions reduction, recycling, and environmentally beneficial fuels, products and services; and
• Diversity, including a company’s record with respect to promotion of women and minorities, equal employment opportunities, family friendly employee benefits, and contracts with women and minority suppliers.

The Corporate Governance and Social Responsibility Committee of CREF’s Board of Trustees provides guidance in deciding whether investments meet the social criteria. The Account will do its best to make sure that its investments meet the social criteria, but TCIM cannot guarantee that every holding will always do so. Even if an investment is not excluded by the social criteria, TCIM has the option of excluding the investment if it decides the investment is no tan appropriate investment.

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