Predatory Lending Fact Sheet
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.
-
-
-
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.
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