The failure of the banking industry to serve all consumers fairly has created a void that has fed the growth of the so-called predatory lending (or fringe banking) industry, which includes: payday loan companies, rent-to-own stores, high cost second mortgage companies, and the growing business of auto title pawn companies.

Payday Loans:
Payday loans are single-payment short-term loans based on personal checks that go by a variety of names, including "deferred presentment," "deferred deposits," "cash advance," or "check loans." In a typical loan the consumer writes a personal check drawn on his bank account for the amount borrowed plus the fee. The lender agrees not to deposit the check until the consumer's next payday or up to 14 days. Payday loans are made by check cashing outlets, stand-alone payday lenders, and by a few banks in partnership with check cashing outlets. The fee, when translated into a percent of the check or loan equals triple-digit Annual Interest Rates. A typical loan costs $17.65 to borrow $100 for two weeks, or a 459% Annual Percentage Rate (APR).

National Banks And Thrifts:
Some National Banks and Thrifts have partnered with payday loan companies in order to supersede state law through what is called "exportation". Exportation is done by a bank chartered in a deregulated state. The bank then claims the right to export its home state's lack of regulation all across the country regardless of whether their practices would be illegal in the borrower's home state.

Solution:
States can prevent payday loans through small loan and usury laws. Nineteen states and two territories currently have laws that limit interest rates for small loans. Congress should close the National Bank Exportation loophole and protect consumers. Federal legislation is needed to prevent the use of national bank and thrift charters to evade state small loan rate caps and usury laws. Federal law should be created to prohibit loans based on a personal check made by banks. "Banks should not be in the business of profiteering from desperate borrowers by enticing consumers to write bad checks for exorbitant rates" (testimony of Jean Ann Fox, before the Subcommittee on Financial Institutions and Consumer Credit, H.R. 1584). States with no usury or interest rate caps should enact legislation to put limits on the cost of payday loans. States should lower maximum rates and comprehensive consumer protections. Fees should be based on the proceeds of the loan, not on the face value of the check. Legislation should prohibit loan rollover and "hot-check" prosecution abuses by the loan companies.

Predatory Mortgage Lending:
Predatory Mortgage Lending is the process of making high-cost home loans without regard to the borrower's ability to pay it back, which causes the home loan more often than not to end in foreclosure. In addition, predatory loans may contain features like credit life insurance or transactional fees that increase the cost of the loan. Sub-prime mortgages are loans that have high interest rates and fees that are made to borrowers deemed by lenders to be higher credit risks. For example, the prime interest rate for a home mortgage in January of the year 2000 was 8.375% for borrowers with the best credit rating. A sub-prime loan may carry an interest rate of 9% or 10% and sometimes a rate as high as 18% for borrowers with less-than-perfect credit qualifications.

Who Do They Target?
Predatory mortgage lenders target borrowers that have substantial equity in their homes and that have low or fixed incomes. This assures a predatory lender that if the borrower defaults on the loan and the home goes into foreclosure, the lender will recover its' losses through the sale of the home. By focusing on homeowners who have sizable equity in their homes, predatory lenders tend to target elderly homeowners. Predatory lenders also seek out homeowners with limited knowledge about finance or who have limited English skills. Consequently, predatory lenders tend to target low- to moderate-income households or areas with non-English speaking ethnic groups. Many times, these areas are minority-populated areas which are underserved by traditional banks.

Solution:
These practices must be stopped by strict state laws which prohibit practices of predatory mortgage lending such as huge balloon payment requirements and prepayment penalties as well as APR rates that increase over time.

Title Loan Lenders:
The title loan industry is a fairly new fringe banking service that is rapidly spreading across the country. It is similar to the payday lending industry in that the lenders target consumers who may not be eligible for traditional loans. Title loan companies require the consumer's vehicle title to be placed as collateral for the small loan.

Vehicle Repossessed:
The title loan lender then has the power to repossess the consumer's vehicle if a payment is missed. A title loan agreement is usually for a period of 30 days; the consumer must make a payment each month, which is on interest only.

Exorbitant Interest Rates:
A typical payment agreement for a $400 loan is a minimum monthly payment of $88, none of which is applied to the principal. This amounts to an uncompounded APR of 264%. According to the Consumer Federation of America, the loan can be a maximum of 20% of the vehicle's value. Title loan lenders often will refuse to make a loan if the value of the car is not sufficient. They also require an extra set of keys to facilitate easier vehicle.

Solution:
Make title loans illegal. They should be considered small loans, and therefore subject to state small loan caps and usury laws.

Rent-To-Own:
The rent-to-own industry sells the American Dream of ownership and then takes that dream away, with harsh contracts that require up to 78 weeks to pay and undisclosed interest rates as high as 300%-400% or more. Often, the goods aren't even new, but have been rented numerous times. Unfortunately, the rent-to-own industry has convinced at least 45 states to treat its credit sales as if they were leases, which are subject to much fewer consumer protections.

High Costs:
Purchasing items via rent-to-own at RTO stores costs 2-5 times as much as purchasing the same items at department and discount stores. Although the industry claims it prominently provides all the disclosures consumers need, the survey found that 37% of items had no clear marking "used" or "new" on the label, and that 50% of labels disclosed the total cost to own in smaller print than the weekly cost. RTO dealers routinely charge consumers up to 78 weekly payments of $9.99; almost $800 for television sets, many of which are often used, not new. Similar or identical sets average $220 brand new from a department or discount store.

Solution:
Require the rent-to-own industry to adhere to lending laws that protect consumers who buy goods on time. New Jersey, Wisconsin, and Minnesota, all by court decision, view rent to own as transactions purchased over time, or credit sale. These states hold the RTO industry to disclosure rules and usury limits. When consumers pay for goods over time, the difference between the cash price and the total price should be interest and should be considered as such.

Colorado And Predatory Lending:

Payday Loans:
The Colorado Uniform Consumer Credit Code (UCCC) was amended in 2000 concerning the practices of payday lending or what they referred to as deferred deposit loans. While they put some restrictions on payday lending practices, they did not require them to be thought of as small loans and therefore to be subject to the Colorado small loan cap of 36% APR.

The amended law allows not more than 20% of the first $300 plus 7.5% of the excess to be charged. Loans are allowed to be renewed once, and the renewal fee is subject to the same permitted fees as the initial transaction. Lender may contract to receive a $25 fee if upon deposit, the consumer's check is returned for insufficient funds, plus court costs and reasonable attorney fees in the event of default. The changes did require much more disclosure regarding fees and agreement including the annual percentage rate and the total amount of finance charges.

Colorado does not allow for criminal "hot check" prosecution for checks returned for insufficient funds; however, a lender may include in the contract a fee of up to $25 for a returned check.

While these changes address a consumer's right to know, they do nothing to help consumers with the exorbitant interest rates and coercive nature of a deferred check loan. Colorado consumers continue to be charged annual interest rates of over 520% on payday loans.

Predatory Mortgage Lending:
Mortgage brokers are currently not licensed by the state of Colorado and therefore are not subject to any regulatory oversight by the Department of Regulatory Agencies. However, second mortgage lenders are licensed by the State of Colorado and are subject to a state mortgage loan cap of 21%, and no prepayment penalties are allowed.

Title Loan Lender:
The Colorado Attorney General's office has taken a position that title loan lending is in fact a small loan and subject to the small loan cap of 36% in Colorado. The office has submitted the opinion that title loan lending is illegal according to Colorado State law, although the law does not specifically outlaw it.

Rent-To-Own:
Colorado law views rent-to-own agreements as rental agreements, and not as credit purchases. Therefore, rent-to-own businesses are not subject to state small loan caps. However, The Colorado Rental Purchase Agreement Act of 1990 (UCCC 5-10-101) does pose some rate and fee limitations. The Act prohibits:

• Balloon payments, in addition to regular lease payments to acquire ownership.
• Assignment of earnings
• Wage garnishment
• Repossession or "breach of peace"
• Waive defense or counterclaim

Fee limitations provided in the Act:

• Late charge payments for monthly agreements cannot exceed $5.00 for the month, and only after payment is late by 5 days.
• Late charge payments for a weekly lease payment agreement cannot exceed $3.00 for the week, and only after payment is 3 days late.
• No penalty for early termination of lease agreement.
• No sale of insurance by the lessor.

The Colorado Rental Purchase Agreement Act also includes a section on what a lessor must disclose clearly to the lessee, and the Attorney General's office enforces this law through industry oversight. The rent-to-own industry still charges exorbitant interest rates for used items.