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

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.


Overview

• Predatory Mortgage Lending

• Payday Lending

• Car Title Lending

• Overdraft Lending

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


Race/Ethnicity and Wealth

Median net worth of households (2002)

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


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%


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.


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

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

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Monthly Payment $1,405 $1,918

Post-Tax DTI 61% 83%

Teaser Rate Fully Indexed Rate

Source: CRL Calculations


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


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

Source: CRL Calculations


TRF Report on DE Foreclosures

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


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


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


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


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.


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.


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.


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


Policy Solutions

Loans Should Have a Longer Term.

Loans Should Permit Repayment in Installments.

Rates Should Be Lower.

Lenders Should Consider Ability to Repay.


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.


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.


-$300

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$0

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A MONTH ON THE EDGE

LIFE IN THE OD DEBT TRAP


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-$33 OD fee assessed for $2.58 POS purchase


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


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-$33 OD fee for $25 check


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-Sustained OD fee


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

Life in the OD Debt Trap


Policy Solutions

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

bank and credit union alternative products.

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