Presentation on theme: "Predatory Lending and Public Policy: We Must Protect Wealth to Build Wealth Eric Halperin"— Presentation transcript:
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.