Http:// Predatory Lending and Public Policy: We Must Protect Wealth to Build Wealth Eric Halperin [email protected].

http://www.responsiblelending.org

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

Eric [email protected]

202-348-1859

October 26, 2006Jessie Ball dupont Fund

Building Financial Assets Conference

http://www.responsiblelending.org 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 nation’s largest community development financial institutions.

http://www.responsiblelending.org 3

Overview

• Predatory Mortgage Lending

• Payday Lending

• Car Title Lending

• Overdraft Lending

• Cost to Communities: More than $25 Billion per year

http://www.responsiblelending.org 4

Race/Ethnicity and Wealth

Median net worth of households (2002)

Non-Hispanic White: $88,651 Hispanic: $ 7,932 Non-Hispanic Black : $ 5,988

http://www.responsiblelending.org 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%

http://www.responsiblelending.org 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.

http://www.responsiblelending.org 7

Example2-28, $200,000 ARM

Subprime Adjustable Rate Mortgage Payment Shock(No Change in Interest Rates)

$-

$500

$1,000

$1,500

$2,000

$2,500

Mo

nth

ly P

ay

me

nt

(Pri

nc

ipa

l &

In

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st)

0%10%20%30%40%50%60%70%80%90%

Po

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Ta

x D

eb

t-to

-In

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me

Monthly Payment $1,405 $1,918

Post-Tax DTI 61% 83%

Teaser Rate Fully Indexed Rate

Source: CRL Calculations

http://www.responsiblelending.org 8

Precursors to Foreclosure

1. Borrower cannot or will not pay loss of income or increase in payments

2. Loss of alternatives when home equity will not support refinance or sale to cover debt

http://www.responsiblelending.org 9

Subprime Foreclosures, Year 2000 Loans (as of May 2005)

Source: CRL Calculations

http://www.responsiblelending.org 10

TRF Report on DE Foreclosures

TRF Delaware Foreclosure Study, available at http://www.trfund.com/resource/downloads/policypubs/Delaware_Foreclosure.pdf

http://www.responsiblelending.org 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

http://www.responsiblelending.org 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

http://www.responsiblelending.org 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

http://www.responsiblelending.org 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.

http://www.responsiblelending.org 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.

http://www.responsiblelending.org 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 [email protected] or 804.643.2474. 

Deauthorize payday lending in states where it is authorized.

Bank and Credit Union Alternative.

http://www.responsiblelending.org 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

http://www.responsiblelending.org 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.

http://www.responsiblelending.org 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.

http://www.responsiblelending.org 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.

http://www.responsiblelending.org 21

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

$700

A MONTH ON THE EDGE

LIFE IN THE OD DEBT TRAP

http://www.responsiblelending.org 22

-$300

-$200

-$100

$0

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4/5/

2006

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-$33 OD fee assessed for $2.58 POS purchase

http://www.responsiblelending.org 23

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

$700

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

http://www.responsiblelending.org 24

-$300

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$0

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-$33 OD fee for $25 check

http://www.responsiblelending.org 25

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

$700

-Sustained OD fee

http://www.responsiblelending.org 26

-$300

-$200

-$100

$0

$100

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$700

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6

- Large deposit followed by monthly bill payments – a whole new cycle begins?

Life in the OD Debt Trap

http://www.responsiblelending.org 27

Policy Solutions

Federal Issue: Consumer Overdraft Fair Practices Act (HR 3449).

bank and credit union alternative products.