Subprime Lending: Quantifying the Texas Market

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Subprime LendingQuantifying the Texas Market
Prime, Subprime, and Manufactured Home Lender
Shares of Total Loan Applications in California,
Florida, New York, and Texas, 1999-2001
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Subprime LendingQuantifying the Texas Market
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Subprime LendingQuantifying the Texas Market
Census Data Cameron El Paso Hidalgo Webb Texas
Housing units, 2002 126,674 232,142 207,597 59,426 8,502,060
Home ownership rate, 2000 67.70 63.60 73.10 65.70 63.80
Median value owner occupied housing unit, 2000 53,000 69,600 52,400 74,600 82,500
Median household income, 1999 26,155 31,051 24,863 28,100 39,927
Housing starts, 2002 3,917 3,710 7,477 1,805 165,027
Units not mortgaged 35.80
Median monthly costs of units with a mortgage, 2000 757 798 765 899 986

Data from Experian
Debt (avg non-mtg debt) 6996 8099 6996 7273 9348
Credit usage (avg use of cred limit) 26.4 26.3 26.4 26.9 25.3
Late payments ( accts past due at least 1 pmt) 1.2 0.93 1.2 1.82 1.19
Credit inquiries ( cred rpt requested by lenders within last 2 yrs) 2.67 3.35 2.67 2.13 2.66
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EducationPredicting the future
Source Steve H. Murdock, Texas State Data Center
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Credit ScoringTexas and the Nation
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Information AsymmetryEffects of Life
Disruptions and Education at the Point of Need
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Information AsymmetryImportance of
Understanding the Transaction

• Subprime mortgage loans contain complex pricing
  structures and terms that are difficult for even
  the most financially astute borrowers to fully
  understand. As products become more complex, the
  imbalance of knowledge, or asymmetry of
  information, between well-informed lenders and
  brokers and less well-informed buyers and
  borrowers widens and the potential for abuse
  increases.
• Key Concerns from consultative session Low-Income
  Families and Asset Building on the US
• Mexico Border by the Latino Financial Issues
  Program supported by the LBJ School of Public
  Affairs
• and Annie B. Casey Foundation target
• Bicultural and bilingual content in outreach
  programs
• Building trust among the various stakeholders in
  remedying the lack of financial planning
  knowledge and consumer behavior strategies among
  low-income Latino families
• Exposing low-income Latino families to
  governmental officials and agents to minimize the
  degree of authority intimidation and to
  humanize the bureaucratic process
• Designing financial services programs and
  outreach efforts to promote a community based
  ownership perspective this implies that
  residents must experience self-empowerment and
  ownership when participating in financial
  planning and consumer behavior strategy programs
• Inclusive participation of residents in programs
  and minimizing the degree of autocratic
  interaction with governmental agencies and
  officials

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Information AsymmetryFocused Education is
Effective Education

• Office of Consumer Credit Commissioner
  involvement
• The agencys mission includes a charge to educate
  consumers and creditors, thereby producing a
  fair, lawful, and healthy credit environment for
  social and economic prosperity in Texas
• The agencys education program has two primary
  goals
• Equipping consumers with the necessary knowledge
  to use credit wisely
• Educating industry so that its members are better
  informed of their responsibilities under the law
• Consumer education focuses on four primary
  populations
• The elderly
• Low-income groups
• Students
• It has been reported that college students
  receive 25 credit offers each semester
• College administrators claim to lose more
  students to credit card debt than academic
  failure
• Recent Immigrants
• OCCC uses multiple methods to reach its target
  populations. These delivery mechanisms include
• The agencys Web site
• Media outreach
• Participation in school classrooms, events, and
  school-sponsored functions
• Direct outreach at events sponsored by groups
  with links to the targeted populations
• Publications designed to address specific areas
  of concern or to connect with specific populations

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Information AsymmetryFocused Education is
Effective Education
Office of Consumer Credit Commissioner
involvement (continued)

• Development of model plain language contracts
  The agency has developed model plain language
  contracts in English and Spansih for its
  licensees to use. The legalese in contracts has
  been replaced by consumer-friendly words and
  phrases. A before-and-after comparison of a
  traditional and plain language contract yields
  some impressive numbers. For example, the plain
  language version of the sample sentence has 40
  fewer words and scores fourteen times better on
  the Flesch-Kincaid readability test. These model
  plain language contracts are currently only
  required of licensed lenders. It is possible the
  Legislature could take action to encourage use in
  the broader mortgage market.
• Education philosophy Education is most effective
  when provided relevant to an immediate need. For
  example, mortgage education will be most
  effective when provided to consumers just prior
  to their purchase of a home.

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Financial Literacy EducationGarnering Attention

• Ace Cash Express recently distributed book covers
  containing financial literacy information to over
  800,000 Texas school children. OCCC and Ace Cash
  Express worked together to develop the financial
  literacy content.

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Financial Literacy EducationGarnering Attention

• Ace Cash Express recently distributed book covers
  containing financial literacy information to over
  800,000 Texas school children. OCCC and Ace Cash
  Express worked together to develop the financial
  literacy content.
• Recently, Citigroup and the Citigroup Foundation
  announced a 10-year, 200 Million global
  financial education commitment, the formation of
  a new Office of Financial Education and a global
  initiative designed to encourage all 275,000
  employees to devote time to support financial
  education and other charitable causes. Under the
  new initiative, employees may take a day off from
  work to volunteer.
• The Texas Alliance of the Boys and Girls Club
  will partner with Citigroup in North Texas,
  Houston and San Antonio to provide Financial
  Education Curriculum programs in 44 Clubs for one
  year. Using Citigroups curriculum, staff will
  be trained by Citigroup volunteers. More than
  4,000 youth from 3rd through 12th grades will be
  taught in these clubs with assistance from
  employee volunteers.
• Household Financial Corporation made financial
  contributions to Vecinos Unidos, a Texas
  non-profit corporation created by the residents
  of West Dallas to develop affordable housing in
  inner city neighborhoods within the City of
  Dallas. In addition, working with organizations
  around the state, Household plans 9 Consumer
  Education workshops in Texas.
• The Texas Financial Services Association reports
  that teachers in 38 states have registered to use
  MoneySKILL, a free, online personal finance
  curriculum from the American Financial Services
  Association Education Foundation (AFSAEF) thats
  aimed at the millions of high school students who
  graduate each year without an understanding of
  credit cards, budgeting, insurance or other money
  management fundamentals.

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Debt Management and Credit Counseling IndustryA
Few Facts

• Nationally, Americans owe almost 2 trillion in
  consumer debt, 728 billion of which involves
  credit cards or other revolving accounts
• The number of bankruptcies has nearly doubled in
  the past ten years as has consumer debt, which
  now stands at record levels
• Only ten years ago, there were about 200 credit
  counseling organizations throughout the country
  by 2002, there were more than 1,000
• Nearly all credit counseling organizations
  maintain some kind of nonprofit status
• Between 2000 and 2003, 810 consumer credit
  organizations applied to the IRS for tax-exempt
  status under Section 501(c)(3)
• Debt consolidation is one of the nations fastest
  growingthough still largely unregulatedindustrie
  s
• An estimated 9 million Americans have some kind
  of contact with a credit counseling agency each
  year

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Financial Literacy Strategies to Address
Predatory Lending

• Recommendations
• An expanded public sector role could be helpful
  in increasing financial literacy, disclosure and
  reporting requirements, as well as generally
  assisting consumers to better understand their
  options. Because loan pricing is not transparent
  and the market is heterogeneous, it is easy for
  consumers to become confused.
• Expand regulatory oversight powers and
  enforcement of riskier lending pools.
• Industry development of more standardized
  procedures and products that more efficiently and
  fairly assess and allocate credit.
• Public/Private Partnership Pilot Program A
  border city could be selected for the initiation
  of a pilot project where resources from both the
  public and private sector could be harnessed to
  develop and launch an education effort relevant
  to the needs of the community. Should the effort
  show demonstrable results at reaching community
  members with relevant education material, the
  program could then be expanded to meet the needs
  of other areas in the state.

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