The High Cost of Being Poor:

1

• The High Cost of Being Poor
• Predatory Mortgage Lending and Payday Loans in
  Oklahoma

Community
Action Project
717 S. Houston,
Suite 200
Tulsa, OK 74127 P (918)
382-3254 F [phone]

publicpolicy_at_captc.org
www.captc.org/public-policy.asp
2
Presentation Overview

• Discussion of the High Cost of Being Poor
• Predatory Mortgage Lending
• Examples of Predatory Practices
• Background on Regulation of Predatory Lending
  (federal law and how certain states have
  addressed the problem)
• The Impact of North Carolinas Anti-Predatory
• Lending Law
• The Size of the Problem in Oklahoma
• Oklahomas Legislative Response (HB 1574) and its
  Weaknesses
• Payday Lending
• The Dangers of Payday Lending
• Data on How Payday Lending Leads to Treadmills
  of Debt
• SB 583 Oklahomas Deferred Deposit Lending
  Act and its Weaknesses

3
The High Cost of Being Poor

• The world of finance in low-income communities
• A loosely regulated network of payday lenders,
  subprime home mortgage loans, refund
  anticipation loans, rent-to-own stores, pawn
  shops, etc.
• High costs of the poverty industry operate to
  drain wealth from the working poor
• Often accompanied by unscrupulous and/or
  fraudulent lending practices. The terms and
  practices used by some lenders amount to little
  more than legalized loan sharking.
• Focus of this presentation predatory mortgage
  lending and payday loans

4
Predatory Mortgage Lending

• Unscrupulous mortgage lending practices that
  often lead to lost equity, increasing debt, and
  foreclosure. Predatory mortgage loans are
  typically re-finance mortgages characterized by
  high costs and oppressive terms and conditions.
  Found most frequently in the subprime lending
  market.

5
Predatory Mortgage Lending

• What are some examples of predatory mortgage
  lending
• practices?
• Excessively high costs
• Flipping
• Large prepayment
• penalties
• Balloon terms
• Who are the lenders?
• Out-of-state finance companies
• Who are the victims?
• Seniors often have significant equity coupled
  with a financial need
• Minorities may lack access and/or familiarity
  with the traditional mortgage lending market
• Low-income borrowers regularly in financial
  need, home equity a primary source of wealth

• Single premium credit life insurance
• Mandatory arbitration
• Loans for well over 100 of a homes value

For a more complete discussion of predatory
lending practices, please see Stealing the
American Dream Predatory Lending in Oklahoma at
www.captc.org/public-policy.asp.
6
Background on Regulation of Predatory Mortgage
Lending

• Federal Law Home Ownership and Equity
  Protection Act (HOEPA)
• High Cost thresholds Interest T rate 8
  for first liens T rate 10 for second liens
  Points and Fees 8 or 480 (adjusted annually
  for inflation).
• Limited protections for borrowers of high cost
  loans.
• HUD/U.S. Treasury (2000) report on predatory
  lending recommended tightening of HOEPA.
• Other important laws Truth in Lending Act
  (TILA) Real Estate Settlement Procedures Act
  (RESPA). Primarily disclosure statutes.
• States Respond to Insufficient Federal Regulation
• North Carolina
• State law lowers points and fees threshold to 5
  for loans greater than 20,000, 8 for loans less
  than 20,000 Requires loan counseling for all
  high cost loans Prohibits prepayment penalties
  (on loans of less than 150,000) Prohibits
  balloon terms.
• Arkansas
• State law lowers points and fees threshold using
  graduated system 5 for loans greater than
  75,000, 6 for loans from 20,000 - 74,999, and
  8 for loans less than 20,000 Requires loan
  counseling Prohibits balloon terms and mandatory
  arbitration.
• Other states with consumer friendly
  anti-predatory lending statutes New Mexico,
  Georgia, California, New York, New Jersey,
  Illinois

7
Effects of State Efforts

• Study by UNC titled The Impact of North
  Carolinas Anti-Predatory Lending Law (2003)
• NC Law Reduced Predatory Lending
• Prepayment penalties of 3 years or more fell 72
  - increased nationwide by 20 and in a
  neighboring state by 261 (SC).
• Loans with balloon terms dropped 53 since
  enactment, compared to a 16 drop nationwide.
• Subprime refinance loans fell by 20, compared to
  a 3 drop nationwide.
• Number of subprime loans with a loan-to-value
  ratio of 110 or greater fell 35, compared to a
  2 increase nationwide.
• North Carolina Maintained a Healthy Subprime
  Market
• Subprime home purchase loans increased by 43, on
  par with other states in the region.

8
The Size of the Problem in Oklahoma

• Over 20,000 loans were issued in Oklahoma
  between 2000-2001 that contained one or more
  predatory elements.

Source Based on Standard Poors, HUD/U.S.
Treasury, and Freddie Mac estimates using Home
Mortgage Disclosure Act (HMDA) loan data. Figures
were rounded to the nearest 100.

• Predatory Lending Practices cost Oklahomans an
  estimated 55.8 million annually (Coalition for
  Responsible Lending, 2001).
• Household International Settlement - 6.1
  million to more than 7,000 Oklahomans.

9
Oklahomas Legislative Response

• HB 1574 2003
• Brought Oklahoma Law up to HOEPA Standards.
• Added additional protections for borrowers,
  patterned after HOEPA.
• However, HB 1574 has several weaknesses
• Leaves the points and fees threshold for defining
  a high cost loan at 8 of the total loan
  amount
• Allows lenders to make high cost loans without
  the requirement of loan counseling
• Allows mandatory arbitration clauses
• Allows lenders to offer credit life insurance on
  a single premium basis
• Limited regulation of prepayment penalties
• Preempts municipalities from taking action
  against predatory lending.
• To close loopholes
• Lower the points and fees threshold to 5
  provide additional protections.

10
Payday Lending

• What are Payday Loans?
• Payday loans are high interest, short term loans
  backed by a borrowers personal check. Since the
  short-terms of these loans often correspond to
  the length of time between paychecks, they are
  commonly referred to as payday loans.
• Payday Loans Are Extremely Expensive
• National survey by the Consumer Federation of
  America (CFA) found that payday lenders charged
  an average APR of 470 to borrow 100 for two
  weeks.
• One of the Most Dangerous Ways to Borrow
• Payday lending often leads to a treadmill of
  debt that develops when a borrower takes out
  multiple loans to cover expenses.
• Payday Lending is a Booming Business
• The industry has grown from a handful of outlets
  nationwide in 1990 to an estimated 14,000 in
  2002. Expected to be a 20 billion industry by
  2004, up from 8 billion in 2000 (Stegman
  Faris, 2002).

11
Payday Lending A Treadmill of Debt

• Lenders Keep You Coming Back For More
• A recent study indicates that of payday loan
  borrowers in Illinois, over one-third (35) took
  out 16 or more loans in one year.

• Source The Woodstock Institute, using data
  gathered by the Illinois Department of Financial
  Institutions for 1999.

12
SB 583 Deferred Deposit Lending Act

• Authorized Payday Lending in Oklahoma as of Sept.
  1, 2003
• Allows lenders licensed by the Department of
  Consumer Credit to issue payday loans.
• Lenders may make loans with a minimum 13 day term
  while charging 15 for every 100 loaned up to
  300. For loans over 300 to a maximum of 500,
  lenders may charge an additional 10 for every
  100 loaned.
• Borrowers may not have more than two (2) loans at
  a time and are not allowed to renew.
• Borrowers may not take out more than five (5)
  loans in a ninety (90) day period without
  receiving credit counseling.
• Establishes reporting requirements for lenders.

13
SB 583s Weaknesses

• Allows for Loans at Exorbitant Costs The fee
  and term schedule of SB 583 makes payday lending
  an extremely expensive way to borrow. For
  example, for a payday loan of 300 with a 13-day
  term, lenders are authorized to charge a fee of
  45, which translates to an Annual Percentage
  Rate (APR) of 421!
• Encourages chronic borrowing and debt traps
  While SB 583 prohibits renewals, it allows
  borrowers to hold two (2) payday loans at one
  time. Consequently, in practice, borrowers will
  be taking out a second loan to pay off the first,
  a third loan to pay off the second, etc.
• Undermines Efforts by the Department of Consumer
  Credit to Reign-In Payday Lending Prior to SB
  583, payday lenders operated under controversial
  rent-a-bank arrangements that the Department
  was challenging it court. SB 583 makes such
  agreements less necessary.
• No requirement to establish ability to repay
• Exempts pawnbrokers and supervised lenders

14
How SB 583 Can Be Strengthened

• Adjust the fee and term schedule to make costs
  more reasonable.
• Limit borrowers to one (1) payday loan at a time
  with a 24 hour waiting period between loans.
• Eliminate exemptions from licensing requirements
  for pawnbrokers and supervised lenders. Extend
  limits to supervised loans.
• Act should prohibit loan contracts that contain
  provisions requiring mandatory arbitration or
  that limit a borrowers legal rights.

15
For Additional Information

• CAPs Public Policy Page
• www.captc.org/public-policy.asp
• For specific questions, you may also contact
  CAP at [phone] or at publicpolicy_at_captc.org
  
• Oklahoma Coalition for Consumer Advocates (OCCA)
• www.okconsumer.org
• Oklahoma Department of Consumer Credit (DOCC)
• To file a complaint or for more on predatory
  mortgage lending and payday lending, contact DOCC
  at 1-800-448-4904 or at www.okdocc.state.ok.us
• Consumer Federation of America (CFA)
• www.consumerfed.org
• National Consumer Law Center (NCLC)
• www.consumerlaw.org
• Coalition for Responsible Lending
• www.responsiblelending.org