MOORLACH UPDATE — Plastic Surgery — December 19, 2015

Merry Christmas!

While a partner in a Certified Public Accounting firm, I had the privilege of chairing a credit counseling nonprofit. When assisting individuals and couples in addressing their debt management, there were several fronts that could be attacked. The four remedies for resolving debt matters were mentioned in my last UPDATE (and are detailed below) (see MOORLACH UPDATE — Streetcar Skepticism — December 18, 2015 december 18, 2015 john moorlach).

So it was fun to answer questions concerning new borrowing opportunities. My responses are provided in the Digital Journal piece below. I enjoyed a similar topic with the County’s retirement system’s decision to participate in direct lending (see MOORLACH UPDATE — Direct Lending — January 24, 2014 january 24, 2014 john moorlach).

Now that I am on the topic of personal finances and proper fiscal stewardship, a topic I spoke and wrote about often in my first career with Balser, Horowitz, Frank & Wakeling, an Accountancy Corporation, allow me to summarize by quoting from the Charles Dickens’ book, "David Copperfield." It is Mr. Micawber’s famous recipe for happiness:

"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Now, in these final few days before Christmas, I know we are all watching our spending. Likewise, so should the State of California. In fact, it needs to do what we would refer to as plastic surgery. It needs to "cut the credit cards" and use whatever excess revenues it receives to reduce the massive borrowing that it has incurred in the last decade.

Now to expand on the four (and maybe five) strategies on managing one’s debts. Obviously, the overall focus has to be one of carefully budgeting and monitoring one’s spending.

If one’s spending exceeds one’s earnings, then one needs to consider how to increase their income. Does one ask for a raise? Do they find a better paying job? Or should the idea of taking on a second job be entertained?

Second, reduce spending. Look for areas that can be cut or eliminated.

Third, consider refinancing one’s debts. If an equity line at 4% is cheaper than credit card interest rates at 18%, then consider this option.

And, fourth, see what can be sold. Use the proceeds to pay down debts.

In the case of Orange County, the fifth option was to sue the investment banks, broker/dealers, and other professionals that helped get Robert Citron into the mess that caused the Chapter 9 bankruptcy filing.

These strategies must also be applied at the state level, which explains my quote in yesterday’s UPDATE below (P.S. I believe you can raise taxes by lowering tax rates):

He said the state’s options are to try to raise taxes, get serious about cutting expenses, capitalize on low interest rates to restructure debt, sell assets or, he added with a chuckle, look at "Who can we sue?"

Op-Ed: California officials seek precautions for online lending trends

By Jonathan Farrell 38 mins ago in Small Business

Sacramento – Americans now owe over $885 Billion of revolving debt, according to sources at the Federal Reserve and much of it is entangled in credit card debt. This might be one of the reasons online lending is growing.

Online lender businesses have been increasing to the point that this month, The California Department of Business Oversight expressed concerns that consumers should take precautions when applying for such loans. This is why the department on Dec. 11, launched its survey efforts to better understand the current workings of this new trend in loans.

“These online lenders are filling a need in today’s economy, and we have no desire to squelch the industry or innovation,” said DBO Commissioner Jan Lynn Owen. “We have a duty, however, to protect California consumers and businesses, and they have more and more at stake as this industry grows. We want to assess the effectiveness and proper scope of our licensing and regulatory structure as it relates to these lenders," she said.

Leading financial publications like Fortune and Forbes previously reported very favorably of this new type of lending back in April of this year. Part of the appeal is naturally low interest rates. Forbes noted in its April 2015 issue that some online lenders were offering a reduction in interest as much as 31 percent. Basic credit cards typically have interest rates that are higher than 13 percent, and some can be as high as 29 percent, especially if a payment is unpaid or late.

Credit card companies often get away with this because of the spending habits of people. For more than 60 years, credit cards have made it very easy for people to borrow money. Yet, as Forbes noted, people rarely consider the interest rate. And, to make things more complicated, most people don’t view the credit card as a loan, they see it as a spending tool.

With the allurement of "rewards" or "travel miles" it is no surprise to California State Senator John Moorlach. News of the DBO’s survey outreach peaked his interest. He has decades of experience as a CPA and financial consultant. "Mismanagement of the use of credit has been a major problem (for the American consumer) for a long time."

Whether the credit card be packaged as a "silver, gold or platinum plus" card, Moorlach knows all too well the dangers of using credit too often. "The effort to provide points for credit card usage is a way to migrate people away from using personal checks. If it is being abused by building new debts, he added, that gets back to an education process and a budgeting exercise."

Both Fortune and Forbes cite part of the ability of online lenders to offer such attractive rates to customers is because online lending is low cost. Applications are made online and this challenges the traditional way banks have typically processed loans (paperwork, approval processes, etc.) for the past half-century or so.

"With the liquidity crisis of 2008, said Moorlach, nonbank lenders have proliferated to fill a need. With banks being severely restricted, many institutional investors have provided funding for lending to highly rated businesses."

“Free markets have a way of filling voids. If such lenders experience low default rates, then this will be another growing niche.”
Fortune pointed out that small businesses were the hardest hit by the Recession of 2008. And, in its April 28 commentary section this past year, Fortune reported that former New York City treasury secretary Larry Summers foresees an influx of loans to small businesses thru online sources as much as 70 percent.

"It only seems obvious that, although much riskier, some would provide funds to smaller businesses," noted Moorlach. "I would venture to guess that they receive a higher interest rate than banks do. And using the technology of the internet, he added, they have immediate access and don’t need buildings and branches."

Credit to business is perhaps the single largest source of lending in the world as Entrepreneur magazine notes. Back in 2005 Entrepreneur talked to David Gass, a financial and business credit consultant. He said that a common mistake business owners make is mixing personal credit with business credit. And, with this in mind, it is no wonder that small businesses are among the first in line to apply on line. After reviewing some of the details on the subject, "It looks like I’m on target," said Moorlach.

"If transactions are handled in a professional manner," said Moorlach, "on both sides of the desk, then this will be a boom. If unscrupulous parties jump in," he added," then regulatory efforts may be necessary."

In the short span of four years from 2010 to now, online lending has grown from $1 billion in loans to over $12 billion. Some financial analysts say that by the end of the decade the amount of loans provided through online lenders could increase to as much as $122 billion.

"Online lenders bill themselves as a faster, more accessible source of financing for consumers and small businesses. Some of the largest of these new online lenders are headquartered in California," said Dresslar. Because this new trend is reaching out to both the individual consumer as well as business owners, the DBO and others want to better understand what is going on.

As part of the inquiry, the DBO sent an online survey to 14 online or as the DBO refers to them ‘marketplace lenders’ requesting a five-year trend data about their loan and investor funding programs. The survey also requests information about the firms’ business models and online platforms. The DBO sent the request to firms that specialize in either personal or small business loans, or engage in both types of lending. The survey responses are due by March 9, 2016.

For more information visit the California Department of Business Oversight web page.

This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of


This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District.

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