Predatory Lending and Public Policy: We Must Protect Wealth to Build Wealth Eric Halperin 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 nation’s 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 Example 2-28, $200,000 ARM Source: CRL Calculations

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

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 pubs/Delaware_Foreclosure.pdf TRF Delaware Foreclosure Study, available at pubs/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 or  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

Large deposit followed by monthly bill payments – a whole new cycle begins? Life in the OD Debt Trap

27 Policy Solutions  Federal Issue: Consumer Overdraft Fair Practices Act (HR 3449).  bank and credit union alternative products.