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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.
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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
tere
st)
0%10%20%30%40%50%60%70%80%90%
Po
st-
Ta
x D
eb
t-to
-In
co
me
Monthly Payment $1,405 $1,918
Post-Tax DTI 61% 83%
Teaser Rate Fully Indexed Rate
Source: CRL Calculations
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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
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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
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$0
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A MONTH ON THE EDGE
LIFE IN THE OD DEBT TRAP
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-$300
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$0
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-$33 OD fee assessed for $2.58 POS purchase
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-$300
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$0
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-Sustained OD fees of $5/day assessed five days in a row, with no transactions
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-$300
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$0
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-$33 OD fee for $25 check
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-$300
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-$100
$0
$100
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-Sustained OD fee
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-$300
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$0
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- Large deposit followed by monthly bill payments – a whole new cycle begins?
Life in the OD Debt Trap