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

Predatory Lending and Public Policy: We Must Protect Wealth to Build Wealth. Eric Halperin eric.halperin@responsiblelending.org 202-348-1859 October 26, 2006 Jessie Ball dupont Fund Building Financial Assets Conference. About CRL.

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

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  1. Predatory Lending and Public Policy:We Must Protect Wealth to Build Wealth Eric Halperin eric.halperin@responsiblelending.org 202-348-1859 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. Example2-28, $200,000 ARM Source: CRL Calculations

  8. Precursors to Foreclosure • Borrower cannot or will not pay • loss of income or • increase in payments • 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 http://www.trfund.com/resource/downloads/policypubs/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 helen@virginiainterfaithcenter.org or 804.643.2474.  • 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

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

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

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