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NFL Players, Lockout Loans, and Predatory Lending

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Over the last couple of days I've been sucked into the NFL Draft. It's amazing to me how many people study it down to the smallest detail. It reminds me a little of my wife's American Idol sites. The strange thing about me being interested in it is that I don't follow college football at all. I don't think I watched 10 minutes of it in the last 3 or 4 years combined - maybe it was on in the background and I looked up or something. I should have even less interest in watching the draft this year as there's no guarantee of football season given the players and owners don't have a collective bargaining agreement.

That lack of a collective bargaining agreement brings out a few personal finance questions. I wrote before about how some NFL players' are handling their money well with the labor stoppage. Today, thanks to an article that Kosmo from the The Soap Boxers passed on, we can get a glimpse at the other side - what happens when NFL players' don't handle their money well.

The article's title will give away much of the story: Cash-Strapped NFL Players Seeking High-Risk "Lockout Loans". It's a great article and worth reading on it's on own in its entirety. However, for those who want a quick version, here goes:

With the lockout players aren't making the money anymore. They either have financial commitments or serious lifestyle inflation combined with a lack of savings that render them cash-poor.

What you have here is a perfect storm of potential problems for players:

  • You have a lot of young people who made a lot of money quickly and generally presumed that it would likely keep coming - at least throughout their career.
  • In addition to that, there's a question of intelligence amongst the players. While I contend NFL players are likely to be the most intelligent in sports (they don't come straight from high school, giving them education and the nature of the sport often requires more thinking), many wouldn't agree with me and label them as "dumb jocks."
  • You have a situation where other people typically control their finances. You hope that they had responsible money managers, but you can never tell.
  • You have everyone on their brother trying to scam you because they know you have money.

This situation attracts wealthy lenders who are willing to come in and fill the void - at a price. That price is between 18 and 24% according to the article. And if they default - it can jump up to 36%. The article says that 10% of players have secured this kind of funding and another 20% are in the process of getting this funding. As the lockout continues the number will grow. In addition to these interest rates, the players may be required to get insurance for the loans (since they are athletes with high risk to injury) that requires additional money.

The main question the article puts forth is, "Are these loans predatory?" It presents two sides:

For the lenders, by financial advisor to a number of NFL players Sherard Rogers :

"There’s a market, there’s a demand, and I’m helping an industry that I benefit from also – helping them to better themselves and to make a difference... It's not as if financial advisors setting up these loans are just vultures coming in trying to seize the opportunity to make as much money as possible because we’re dealing with professional athletes," Rogers said. "The key is to figure out how to solve the short-term liquidity issue and put the pieces in place to ensure they don’t have this liquidity issue again."

For the players, by Arizona Cardinal Kicker and NFLPA representative Jay Feely:

"Sounds like total B.S. I think it's predatory and unjust. I don’t think they should be charging those interest rates and I would encourage every player [considering high-risk loans] to look elsewhere. I think if you went to your bank, or outside lending agencies, you're not going to pay that kind of interest. That’s absurd."

The article then makes a great point that Feely may not be accurate about the bank or outside lending agencies helping. Since the sub-prime lending fiasco of a few years ago, getting is loan is harder than ever. Trying to get a loan when you are essentially unemployed is even worse. Being young, it's also quite likely that they haven't built up a credit history.

First let me tackle the question of whether it's predatory. My initial thought is that these loans aren't predatory at the rates described. These are payday loan rates, they are similar to credit card debt rates. I may change my view after looking at what any required insurance costs them. However, I don't have that information.

My other thought is what can be done about the situation?

  1. I would suggest the players take a hard look at their finances and their assets and liabilities. Perhaps they should look at what they can sell to meet financial obligations. It's a hard recommendation for me to give, because the lockout could end next week and the player would have taken a loss if they were buy it back.
  2. The NFL Player's Association has a lockout fund that would pay each player up to $60,000. Some of the more generous players who have presumably good financial skills like DeMarcus Ware have foregone taking that money to help players who need it more. The $60,000 is not considered enough for many NFL players though.
  3. Players could take loans from other players. This seems to be one of the most natural solution, since they are all in this lockout together. They share the same locker room and are often "on the battlefield" (as it is called) together. I know that lending money to friends can be a touchy subject. Still, it seems like some of the richest players could get together and create a fund to lend out money at better rates if they wish.
  4. If players have good enough credit, an option is to look at P2P lending companies such as Lending Club or Prosper. Lending Club's maximum loan increase to $35,000 could stem the tide. However, for the players that qualify, they may only find marginally better rates than the 18% mentioned in the article. As a P2P lender, I don't know if I want to lend to a NFL Player. On one hand, they have a public image, so they wouldn't want the public defaulted loan on their record. On another, I could see them putting off making payments when football starts back up because they've got bigger things going on (getting caught up and in shape for the season).

Finally, I leave you with this. The financial advisor quoted in the article suggested the situation could be considered a "coaching moment." That sounds like some tough love, but it's got a lot of truth behind it. Financial responsibility often comes from overcoming financial difficulties.

Posted on April 14, 2011.

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12 Responses to “NFL Players, Lockout Loans, and Predatory Lending”

  1. Hardly surprising that you don’t watch college football. Who would you follow – UMass?

    One thing to note is the NFL contracts aren’t guaranteed, unlike baseball. So even if a player has 50 million remaining on his contract, there’s no guaranteed that he’ll see a dime, even after the stoppage is resolved – so they can’t really use that as collateral. However, you do think they’d be able to get a better rate by using their pension as collateral.

    I also had the thought that Manning Financial could lend out some money at 10%.

    One of the scariest comments in the article was from Matt Birk.

    “Having [$250,000 to $500,000] to spend or invest — sure, it’s a nice thing,” he said. “But you can get taken advantage of, especially when you’re talking about guys in their twenties. There’s no handbook on how to handle yourself, so you learn some things along the way, and hopefully you don’t lose too big.”

    Now, Birk is a smart guy (Ivy League, I believe), so I doubt he’d take out a 24% loan so that he’d have money to invest … but are there some players who think they could do better than 24% on their investments?

    I always wouldn’t put it past the union to be orchestrating some of this in an effort to strengthen their position in court (showing the players being in a weak positions). That might not be the case, but after seeing the sham decertification of the NFLPA, I wouldn’t put it past them.

    My entertainment writer, Bob Inferapels, actually pointed the story out to me.

  2. Lazy Man says:

    Well, I don’t follow any college sports. Part of it is probably because I went to a school where homecoming was division 8 fencing (or something like that). However, even before college my friends liked college sports and I didn’t.

    I don’t understand how or why anyone would want to follow 64 basketball teams and all their 5 starters who are only going be there for a year or two. That’s a rotation of learning something like 300 new players every couple of years. I like that when I know a player in pro-sports they tend to stick around in the league a bit. Plus, there’s a lower level of competition at college sports. So where do you go from there, to watching all the nation’s high school level? What about Pop Warner? Lastly, it seems like college sports have become too much of a business and not focused on getting the players a college education.

    Perhaps I should have a guest spot on The Soap Boxers with that kind of rant.

    Good point about the non-guaranteed contracts. I think you take it on a case by case basis. There are players that are very much assured spots when football starts back up.

    As for the Matt Birk comment, I know the Patriots (either the team or the players do it individual) bring in financial consultants and probably quite literally give them a handbook. Maybe that’s why Wes Welker Teaches Students about Personal Finance.

    As for the union putting this to strengthen their position. I wouldn’t buy it. I think it makes the players look bad for not being able to handle their money. Even a minimum contract pays quite well providing enough to live on for a couple of years for the average person.

  3. Hey, go for it. I’d publish your “Why college sports suck” article.

    Let’s dissect this:
    “Even a minimum contract pays quite well providing enough to live on for a couple of years for the average person.”

    Meet John. John is a fictional linebacker who was drafted in the 4th round last year. he’s a bit undersized, but MAN can he hit. BAM. John made $500,000 last year in the first year of a three year deal. After federal, state, and city income taxes, John is left with about $250,000.

    John buys himself a modest home near his place of work (which, naturally, is a large city). $200,000 doesn’t stretch very far there, but John likes the place.

    John also needs some wheels to replacing the Yugo he owned in college. He gets a good deal on a Ford Fusion as a program car. The only has 14,000 miles on it – practically new!

    John’s mother raised two kids as a single mother. He owes her a lot. Now she’s raising her sister’s 4 kids – John’s aunt was killed by a drunk driver when he was a freshman in college. John buys a new house for his mom and spends the money to have it made handicapped accesible so that his mom can easily navigate her wheelchair.

    John’s mom really needs a van to replacing the rust bucket she uses to haul the kids around to school, so John buys her a 4 year old Windstar.

    A couple of months ago, John’s mom lost her job as a special ed teacher when the school district was forced to make cuts amidst decling property tax revenue. John’s helping with her monthly expenses, making sure that the lights stay on.

    After buying two houses (putting 20% down on each), a car and a van in the last year, as well as supporting his mom and four cousins, John is stretched to the limit financially. It will be OK, though – John’s $500,000 pay check for this season should make things much better.

    Then comes the lockout. No pay check for John. Now he’s a 23 year old kid who is highly leveraged. A cash out refi? The banker wishes he could help, but there’s just too much risk.

    So John takes out a 24% loan to tide him over until the work stoppage is over.

    How would that scenario look in a courtroom?

    Yes, this is a completely fictional account … but you and I both now that there are some players whose actual lives aren’t that far removed from John’s.

  4. Lazy Man says:

    I like this… fun.

    Let’s take some real 4th rounders from 2010 – http://fourthandgoalunites.com/2010/03/02/nfl-first-round-picks-got-834-million-in-salaries-guaranteed-bonuses-in-2009/. Most of them got a $400-500K signing bonus. On top of that they all got a 4 year deal of $2M+. So that’s about 1M to work with in the first year. Could you live for a few years on $1M? I would hope so.

    Even after the taxes you’d still have $600K to work with. That’s enough to put 20% on a couple of homes in a lot of areas. Especially because if this person is living in a large city, it’s likely to be condo. In fact he probably buys a condo for his handicapped mom as well since they have nice elevators and no grass to cut. He saves some money there vs. buying a house. Another thing to consider is that many NFL cities are relatively cheap to live in. The exceptions are Oakland (he’ll live in San Francisco), SF, NYC, San Diego, Chicago, Baltimore, and Washington. Buffalo, Green Bay, Jacksonville, Foxborough (New England), Detroit, Tampa, Indianapolis, Dallas, Houston, St. Louis, and a bunch more are fairly cheap ;-).

    In general, I think the court would look at the person representing John’s sad story and say, “How much sympathy are we supposed to have this guy made $1M last year and claiming to be broke.

  5. You found the source I was looking for.

    Let’s knock him down to the late 5th round. That’d give him about $600K or to start with. Let’s make him an offensive lineman, so the endorsement opportunities are zero. Let’s also assume that he took over a starting role at the beginning of the season and his job was secure when he bought stuff.

    Let’s put him in NYC for fun. A condo for his mom? But the 4 kids needs a backyard to burn off energy.

    Maybe have John pay off a chunk of his sister’s student loans. She’s a social worker just scraping by, you know :)

    I fully expect the NFLPA to make full use of some of the true sob stories.

  6. Lazy Man says:

    I still don’t think that there’s any sympathy from the courts. Go all the way to Mr. Irrelevant and he grossed around $425,000 last year. The average person made about 1/10th that. I don’t think 23 year olds are typically expected to buy their mom’s houses – especially with the money they make from their first year of employment.

    As we talk of 5th and 7th round draft choices, there’s even more reason for him to be fiscally responsible as he might be cut and in the same situation as if there was a lock-out.

  7. Why should we hold football players to a higher standard then the rest of us?

    Apparently, many these guys lack a substantial emergency fund and are living paycheck to paycheck.One article states: NFL Players Seek “Lockout Loans” as 22% Live Paycheck to Paycheck.

    How does that % compare to average American families? Should we be equally as unsympathetic of the family of four with two new cars in the driveway, a flat screen hanging on the wall and a mountain of credit card debt?

    How much you make does not determine how well you relate to your money. Normal in America is spending more than you make and building debt not wealth.

    As tempting as it is to find fault with someone who can’t seem to live on those huge salaries, they are really no different then most of the rest of us, the numbers are just larger.

    I hope some of them to use this experience as motivation to change their relationship with money.

  8. Lazy Man says:

    Cassie said,

    “How much you make does not determine how well you relate to your money. Normal in America is spending more than you make and building debt not wealth.

    As tempting as it is to find fault with someone who can’t seem to live on those huge salaries, they are really no different then most of the rest of us, the numbers are just larger.”

    While it is true that how much you make doesn’t not determine how well you relate to your money. Celebrities go broke all the time from bad financial habits. Lottery winners have a similar problem.

    With the numbers being so much larger than the general “rest of us”, it’s easy for the “rest of us” to look at the wasted huge salaries as blowing an opportunity that they never had.

  9. […] out high fee, high interest loans to get the through the lockout. (Excellent post on the subject, NFL Players, Lockout Loans, and Predatory Lending by Lazy Man and Money). This is despite the fact that the Players Association will pay them $60K […]

  10. Hmm. Something happened to my last comment.

    I covered the danger of him being cut by making him a starter doing a good job.

    As for 23 year olds buying their mom a house … yeah, not common in the “real world” – but not uncommon in the sports world.

  11. Lazy Man says:

    Kosmo, that was a pretty specific case you got there. A player from one of the few high market teams, who as drafted in the 2010 draft in the 5th round or lower, became a starter with the level of ability that he won’t have to compete for the job the next year. Oh and he had to have the number of life circumstances as well. I’m not saying it didn’t happen, but at that point, it’s clearly an edge case.

    The point that I was trying to make is that the money players are paid is very good by “real world” standards and hence the court wouldn’t have sympathy. If you are using the the “sports world” standards, well that’s a different debate completely ;-).

  12. Kosmo says:

    Yep, it’s a pretty specific case. However, out of the 1600ish players on the rosters, I’d expect there to be a few like John … or a few cases that the union can twist :)

    I was only use the sports world standard when it comes to the things they do for family. You always hear about guys going into the draft early so that they can help out their family.

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