Asset PreservationChallenges and Prescriptions

Asset Funders Network Meeting

Friday December 9, 2005

Presentation

by

Marva E. WilliamsWoodstock Institute

Summary of High Cost Loan Trends

Lenders justify the high rates by citing the high risk of lending to people with little money and/or bad credit

Marketing: storefronts have high visibility relative to alternatives, aggressive marketing

Small loan trends are indicative of larger U.S. economic trends: decline in middle-wage jobs, rising costs of health care, immigration, people with limited credit histories

Banks no longer make small loans–usurped by credit cards

Finance: securitization of subprime mortgages, payday lender-bank partnerships, stock corporations

Credit scoring

Woodstock Institute Strategy

Regulation of Existing High Cost Products

Consumer Education

on Alternatives

New Product Development

Quick Asset Preservation Facts

In 1980, the savings rate was 10%; in 1990, it was 8%; and in 2000, the savings rate was 0%.

In 2000, homeownership rate for non-Hispanic whites was 72%; African-Americans, 46%; Hispanics, 46%; Asians, 53%; and all minorities, 47%.

The average homeowner had 54% in equity is their home in 2000, down from 70% in 1982.

Household debt to asset ratios have increased from 13% in 1980 to 16% in 2000.

Personal bankruptcies per 100,000 people have increased from 120 in 1980 to 530 in 2002.

Financial institutions are increasingly making their money on fees for financial services rather than the spread between their cost of funds and their loan rates.

Woodstock Institute Social and Economic Indicators (woodstockinst.org)

Key Features of High Priced Mortgage Loans

High interest rates and fees

Prepayment penalties

Balloon payments

No documentation of ability to repay

Single premium life insurance

Aggressive collections

Woodstock Institute (woodstockinst.org); ACORN Fair Housing (acorn.org)

Interest-Only Mortgages

61% of new mortgages in California Lure of low payments Generally 5 year interest only payments Homes may not appreciate as quickly Interest rates increasing Lack of equity Principal payments are forced savings Option ARMs: can pay as little as 1.5% of

mortgage- negative amortization

Greg McBride. Bankrate.com Interest-Only Loans. October 2005.

Key Features of High Priced Consumer Loans

High interest rates and fees

Balloon payments

No documentation of ability to repay

Cannot pay in installments

High Priced Consumer Loans

Payday Loans (PDLs): A high-interest loan made by a storefront lender that advances a consumer’s paycheck for a service fee

Car Title Loans: A short-term loan that uses a consumer’s car title as collateral (consumer must own the car outright)

Refund Anticipation Loans (RALs): A short-term loan borrowed against an anticipated tax refund from the IRS; the borrower pays fees to the lender, which serve as an effective interest rate

Bounced Check Loans (BCLs): a regular feature of checking accounts, bounce protection is marketed as a loan program but regulated as a service

Credit Cards: often have misleading terms and fees, apply universal default, only rate range is advertised, convenience checks have different rates. Secured cards especially expensive. Over 75% of Americans qualify

High Priced Consumer Loans

Other Types of Consumer Loans

Used car loans

Furniture loans

Rent-to-own stores

Pawnshops

Who is Impacted?

Chicago Region Consumer/Community Demographics

Over half of subprime loans are in communities that are over 50% minority

Payday lenders located in minority and low-income census tracts

Payday loan borrowers: three times more likely to be debt burdened, earn 40% of area median-income, young, female, African-American

Community Impacts

Subprime lending = Foreclosures = Property values

For every 100 additional subprime loans on owner-occupied properties from 1996-2001, there were an additional 9 foreclosure starts per census tract in 2002. The contribution of subprime home purchase loans to neighborhood foreclosure is 28 times that of prime home purchase loans

Each conventional foreclosure within one-eighth of a mile of a property (in Chicago, a city block) results in a 1.2% decline in that property’s value

There Goes the Neighborhood: The Effect of Single-Family Mortgage Foreclosures on Property Values by Daniel Immergluck and Geoff Smith, Woodstock Institute. June 14, 2005

Financial Service Locations

Fannie Mae Foundation. Analysis of Alternative Financial Service Providers, 2004.

Wealth Protection Strategies

Policy development

Financial literacy

Affordable PDL alternative loan

Post-purchase counseling: Chicago Neighborhood Housing Services

Rescue fund: National Community Reinvestment Coalition

Tax refund splitting

Policy Development

Mortgage Loans

Data reporting

Document ability to pay

Interest rate and fee limits

No prepayment penalties

No flipping

No financing of single premium insurance

No balloon payments

No loans with negative amortization

Payment plan

Borrowers gets loan they qualify for

Coalition for Responsible Lending (responsiblelending.org)

Policy Development

Short-Term Consumer Loans

Limit rollovers

Document ability to pay

Interest rate and fee limits

Cooling off periods

Payment plan

Public data

Financial Literacy

Curriculum

Basic financial management Cost of money Weigh options

Issues

Puts responsibility on consumers Consumer motivation Long-term impact

Affordable Alternative Loans

Credit Union Affordable Payday Loans

AECF: Low-Cost Payday Loans: Opportunities and Obstacles (aecf.org); Woodstock Institute Reinvestment Alert 16: Affordable Alternatives to Payday Loans: Examples from Community Development (woodstockinst.org)

Lower cost Lines of credit and installment

loans Key features

• Underwriting-financial sustainability

• Financial Literacy• Savings incentives

Post Purchase Counseling

Chicago Home Ownership Preservation Initiatives

Established 3-Year Initiative in 2003

Partnership of Chicago NHS, City of Chicago and Chicago Federal Reserve Bank

knowledgeplex.org/kp2/cache/documents/90881.pdf

Chicago Home Ownership Preservation Initiative

Counseling and education: $25 incentive to attend homeowner’s workshops

Preventing foreclosures through 311 Homeownership Preservation Campaign

Intervention: loan modification, forbearance, NHS reinstatement loans

NCRC Consumer Rescue Fund

Launched in 2001

NCRC and 30 community partners

Background

NCRC Consumer Rescue Fund

Helped 1,000 consumers with high risk predatory mortgages

Mediation with lender to renegotiate terms including loan forgiveness and forbearance

Affordable refinance in 17 states

Impact

Tax Refund Splitting

Background

In 2001, low-income files received $78 billion in refund payments through EITC and other tax credits

Can not save entire refund

Should commit to save part of refund through splitting in two accounts

Tax Refund Splitting

Community Action Project of Tulsa County in Spring 2004

516 filers split refunds into savings and spending components

http://www.tax-coalition.org/Resource%20Library/Splitting_Tax_Refunds.pdf

Refunds to Assets (R2A) Pilot Program

Tax Refund Splitting

R2A Findings

20% filers split refunds

Saved 47% of refunds– of which ¾ had no previous savings

Saved an average of $479

Four months later, more filers still had savings compared to other filers

Role of Foundations

1. Support education and counseling

2. Make advocacy and policy development a priority

3. Convene meetings of advocates and financial institutions

4. Development of best practices

5. Deposits in CDCUs & Community Development Banks

6. Take risks

Acorn Fair Housing Advocates for people with high cost loans acornfairhousing.org

Brookings Institution Research on financial assess for immigrants brookings.edu

Center for Responsible Lending Engages in policy development and litigation for consumers with high cost loans

responsiblelending.org

Consumer Federation of America Consumer advocacy, research, and education consumerfederation.org

Consumers Union Comprehensive source of advice about financial products and services

consumersunion.org

Demos Addresses the widespread economic insecurity and declining opportunity

demos-usa.org

FDIC Money Smart Program Financial education fdic.gov

National Community Reinvestment Coalition

Coalition of nonprofit organizations supporting community reinvestment and economic justice

ncrc.org

National Consumer Law Center Supports new consumer protections or effective implementation of existing protections

Nclc.org

National Council of La Raza Established to reduce poverty and discrimination and improve life opportunities for Hispanic Americans

nclr.org

Neighborhood Housing Services of Chicago

Foreclosure prevention nhschicago.org

U.S. Public Interest Research Group Research, organizing, advocacy, and litigation in the interests of citizens

uspirg.org

Woodstock Institute Promotes means to bring economic resources to lower-income and minority families and communities

woodstockinst.org

Asset Funders Network MeetingFriday December 9, 2005

Wealth Preservation Resources

References

Anderson, Steven G., Min Zhan and Jeff Scott. 2004. Targeting Financial Management Training at Low-Income Audiences. Journal of Consumer Affairs 38, no. 1, Summer.

Anne E. Casey Foundation. Winter 2005. Double Jeopardy: Advocasey Explores the High Cost of Being Poor. Baltimore, MD: AECF.

Azmy, Baher. 2005. Squaring the Predatory Lending Circle. Florida Law Review 57, no. 2, April.

Barr, Michael S. 2004. Banking the Poor. Yale Journal on Regulation 21, no. 1, Winter.

Clancy, Margaret, Michal Grinstein-Weiss. 2001. Financial Education and Savings Outcomes in Individual Development Accounts. Center for Social Development George Warren Brown School of Social Work.

Demos and CRL. 2005. Plastic Safety Net: The Reality Behind Debt in America. Demos and Center for Responsible Lending.

Elmendorf, Fritz and Richard Caponetti. 2005. CBA's Financial Literacy Survey Shows Efforts Aimed at Explaining Credit Scores and Underwriting Process. CBA News Release, April 28.

Immergluck, Daniel and Geoff Smith. 2005. There Goes the Neighborhood: The Effect of Single-Family Mortgage Foreclosures on Property Values. Chicago, IL: Woodstock Institute.

Jacob, Katy. 2002. Evaluating Your Financial Literacy Program: A Practical Guide. Chicago, IL: Woodstock Institute.

Lerman, Robert I. and Elizabeth Bell`. 2005. Can Financial literacy Enhance Asset Building? Urban Institute Opportunity and Ownership Project 6 (September).

Quercia, Roberto, and Michael Stegman and Walter David. 2004. Assessing the Impact of North Carolina Predatory Home Mortgage Law. Fannie Mae Foundation Housing Debate 15, no. 3.

Temkin, Kenneth and Noah Sawyer. 2004. Analysis of Alternative Financial Service Providers. Washington DC: Fannie Mae Foundation.

Westrich, Tim and Malcolm Bush. 2004. Banking on Bounced Checks. Chicago, IL: Woodstock Institute.

———. 2005. Blindfolded Into Debt: A Comparison of Credit Card Costs and Conditions at Banks and Credit Unions . Chicago, IL: Woodstock Institute.