Predatory Lending and Public Policy: We Must Protect Wealth to Build Wealth

1
Predatory Lending and Public PolicyWe Must
Protect Wealth to Build Wealth
Eric Halperin eric.halperin_at_responsiblelending.org
202-348-1859 October 26, 2006 Jessie Ball
dupont Fund Building Financial Assets Conference
2
About CRL

• Nonprofit, nonpartisan research and policy
  organization dedicated to protecting
  homeownership and family wealth by working to
  eliminate abusive financial practices.
• Affiliated with Self-Help, one of the nations
  largest community development financial
  institutions.

3
Overview

• Predatory Mortgage Lending
• Payday Lending
• Car Title Lending
• Overdraft Lending
• Cost to Communities More than 25 Billion per
  year

4
Race/Ethnicity and Wealth

• Median net worth of households (2002)
• Non-Hispanic White 88,651
• Hispanic 7,932
• Non-Hispanic Black 5,988

5
Home Equity and Wealth

• Median value of home equity as share of
• the net worth of homeowner households (2002)
• Non-Hispanic White 61.6
• Hispanic 88.4
• Non-Hispanic Black 88.1

6
Predatory Mortgage Lending

• Predatory Mortgage Lending Practices that strip
  equity and wealth from borrowers.
• Subprime Borrowers Borrowers with credit
  blemishes or insufficient or non-traditional
  credit history.
• Hybrid ARM Loans with a fixed interest rate for
  a set period (e.g. 2 years) and then regularly
  adjust usually at much higher rates.

7
Example2-28, 200,000 ARM
Source CRL Calculations
8
Precursors to Foreclosure

• Borrower cannot or will not pay
• loss of income or
• increase in payments
• Loss of alternatives when home equity will not
  support
• refinance or
• sale to cover debt

9
Subprime Foreclosures, Year 2000 Loans (as of May
2005)
Source CRL Calculations
10
TRF Report on DE Foreclosures

• TRF Delaware Foreclosure Study, available at
  http//www.trfund.com/resource/downloads/policypub
  s/Delaware_Foreclosure.pdf

11
Policy Solutions

• Improve quality of loans being made
• Provide borrowers with products they can afford
• Ensure professional guidance in making loan
  choices
• Promote stronger loan underwriting
• Foreclosure prevention programs and rescue funds
•  
• Predatory lending reforms

12
Payday Lending

• The financial success of payday lenders depends
  on their ability to convert occasional users into
  chronic borrowers.
• Payday Lending A Business Model That Encourages
  Chronic Borrowing
• January 2003, Center for Community Capitalism
• UNC-Chapel Hill

13
Payday Lending Typical Transaction

• Write 300 check dated 2 weeks later
• Walk out with 255
• Loan due in two weeks
• 400 Interest Rate is Typical

14
Payday Lending Debt Trap

• What happens when you cannot repay the loan and
  make it to your next payday?
• 91 of the payday loans go to repeat borrowers.

15
Payday Lenders Targets

• African-American neighborhoods have three times
  as many payday lending stores per capita as white
  neighborhoods.
• This disparity does not change when we take into
  account income, unemployment rate, education and
  other factors.
• Active-duty military personnel are 3 times more
  likely than civilians to have taken out a payday
  loan.

16
Policy Solutions

• Talent-Nelson limits interest to 36 for loans to
  military personnel and their families.
• 36 rate cap currently being considered by
  Virginia. If interested contact Helen O'Beirne
  at the VA PERL helen_at_virginiainterfaithcenter.org
  or 804.643.2474. 
• Deauthorize payday lending in states where it is
  authorized.
• Bank and Credit Union Alternative.

17
Car Title Lending

• Short Term
• Small Size
• Over Secured
• Very High Rates (300 interest or higher)
• Made Without Regard to Ability to Repay
• Frequently Rolled Over
• Jeopardize Many Borrowers Most Valuable
  Possession

18
Policy Solutions

• Loans Should Have a Longer Term.
• Loans Should Permit Repayment in Installments.
• Rates Should Be Lower.
• Lenders Should Consider Ability to Repay.

19
VA FL

• FL Law caps loans at 30 for first 2,000 and
  includes protections on repossession.
• VA considering Title Loan protections contact
  VA PERL for more information.

20
Overdraft Lending

• Bank allows you to overdraft your account through
  check, ATM, or debit transaction and charges a
  fee, usually 25-35.
• 10.3 Billion a year paid in fees.
• Interests rates in the hundreds and thousands.
• Like Payday, repeat users pay almost all the
  fees.
• Distinguished from good overdraft protection,
  such as line of credit and link savings accounts.

21
A MONTH ON THE EDGE LIFE IN THE OD DEBT TRAP
22
-33 OD fee assessed for 2.58 POS purchase
23

• Sustained OD fees of 5/day assessed five days in
  a row, with no transactions

24

• 33 OD fee for 25 check

25

• Sustained OD fee

26
Life in the OD Debt Trap
- Large deposit followed by monthly bill payments
a whole new cycle begins?
27
Policy Solutions

• Federal Issue Consumer Overdraft Fair Practices
  Act (HR 3449).
• bank and credit union alternative products.