From Fringe Banking to the Financial Mainstream

1
The Center for
Community Capitalism
Marketing and Public Policy Conference University
of Utah, Salt Lake City, UT May 20-22,
2004 by Dr. Michael A. Stegman Center for
Community Capitalism University of North Carolina
at Chapel Hill
2
Consumer Research with Most ImpactPotential
Impact SWFA

• Savings for Working Families Act introduced by
  Joe Lieberman (D-CT) and co-sponsored by Rick
  Santorum (R-PA)
• Drafted initial legislation contrary to
  consumer advocates, but ultimately became
  consensus vehicle for bringing Individual
  Development Accounts (IDAs), a form of matched
  savings accounts, to scale
• Rather than working through community-based
  nonprofits and appropriations process, uses
  federal tax system to provide tax credits to
  banks to provide matching funds
• Theory is that fed tax system should provide
  incentives to the poor to save, just as it does
  for the rich, but since poor cant use credits
  directly, exchange credits that banks can use for
  matching funds for IDA programs besides,
  appropriations more constrained than tax credits.
• Introduced in 2000, passed by Senate, but not by
  House now SWFA is contained in President Bushs
  Faith-based Charitable Giving legislation called
  the CARE Act.

3
Litan CritiqueEvidence of Policy Impact

• This study was the first to conclude that
  mortgage loans with abusive terms had declined,
  but its conclusion that subprime lending to the
  highest risk borrowers was not impairedand
  indeed, even increaseddirectly conflicted with
  other notable studies that had concluded just the
  opposite, namely that subprime credit had dropped
  in the wake of the NC statute.
• It is not surprising, therefore, that the UNC
  study had attracted significant attention in the
  media from the time of its publication on June
  25, until August, 2003, the study had been
  mentioned in over 300 press stories in a Nexis
  search.
• Supporters of anti-predatory lending state
  statutes are pointing to the study as evidence
  that states can enact tougher restrictions than
  are imposed at the federal level without
  unintenionally impairing the availability of
  credit to subprime borrowers generally.

4
Consumer Research with Most ImpactEvaluation of
North Carolina Predatory Lending Law

• NC first state to enact predatory lending law
  banning particular business practices that are
  common in subprime lending industry. Subprime
  lending focuses on provision of mortgage loans to
  borrowers with blemished credit
• Fundamental question is whether it is possible to
  regulate subprime lending in such a way as to rid
  the industry of abusive practices without
  throwing out the baby with the bathwater (reduce
  predatory lending without reducing flow of
  mortgage loans to qualified borrowers)
• Until our paper was circulated, academic studies
  and industry consensus concluded that NCs law
  had caused subprime lenders to exit the state and
  overall flow of subprime credit to be reduced,
  thereby punishing consumers
• Using a different dataset than others, and
  changing research question, we determined that
• While overall supply of subprime credit declined
  in NC relative to neighboring states, 90 of the
  fall-off was in abusive or predatory loans also
  found no effects of the law on new purchase
  loans entire fall-off was in refinances, which
  is where most abuses lie.

5
The Predatory Lending Data Debate

• Until our paper, two sources of subprime data for
  predatory lending research
• HMDA, which contains no data on loan terms, or on
  borrowers other than race and location also
  cannot separate subprime from prime loans for
  lenders designated as subprime lenders by HUD
• Proprietary database used by Michael Staten,
  Georgetown Credit Research Center, provided to
  him by an industry trade group, American
  Financial Services Association

6
Debate Over Data

• AFSA data set included 1.4 million loans,
  analyzing just 300,000 of them in four states
  that were made by nine lender members.
• LP database included 3.3 million securitized
  loans in all 50 states made by more than 20
  lenders. In terms of market share, the LP data
  included 42 percent of the entire subprime market
  in 1998, the starting point for our analysis, and
  51 percent in 2002, the endpoint.
• Compared to ours, AFSA database covers fewer
  lenders, ends before many of NCs predatory
  lending laws provisions took effect, and is
  unavailable to other researchers for independent
  analysis.
• Given robustness of the LP data, we are mystified
  by criticism of our work based mostly on dataset
  we used, while policymakers and academics alike
  praise GCRC work without raising any question
  about the nature and composition of their data.

7
Most Effective Means of Reaching Policymakers
with More Academic Consumer Research

• Write applied scholarly papers for publication in
  appropriate journals and then write separate
  policy brief for wide distribution to policy
  makers.
• What has worked for me is collaboration with
  Brookings Institution and their Policy Brief
  series
• Creating a Scorecard for the CRA Service Test
  published in Georgetown Journal on Law and
  Poverty led to presentation to OCC
• Tax Policy as Housing Policy The EITCs
  Potential to Make Housing More affordable for
  Working Familiespublished in Housing Policy
  Debate
• Electronic Benefits Potential to Help the Poor
  book, Savings and the Poor, published by
  Brookings Press led to two invitations to meet
  with Senators, and with Senator Joe Lieberman
  writing forward and my writing legislation,
  Savings for Working Families Act.

8
How to Protect Against Research Biases

• Premise of question implies that consumer
  research(ers) likely to be more biased than more
  traditional academic research(ers), which I
  dispute
• Best protection against undue bias is peer review
  and peer community as much as I take pride in
  policy research, I assume that all of my work
  must withstand peer scrutinywhether it be of a
  more advocacy nature or more straightforward
  applied social science research.

9
Speed vs. Scientific defensible

• Write applied scholarly papers for publication in
  appropriate journals and then write separate
  policy brief for wide distribution to policy
  makers.
• What has worked for me is collaboration with
  Brookings Institution and their Policy Brief
  series
• Creating a Scorecard for the CRA Service Test
  published in Georgetown Journal on Law and
  Poverty led to presentation to OCC
• Tax Policy as Housing Policy The EITCs
  Potential to Make Housing More affordable for
  Working Familiespublished in Housing Policy
  Debate
• Electronic Benefits Potential to Help the Poor
  book, Savings and the Poor, published by
  Brookings Press led to two invitations to meet
  with Senators, and with Senator Joe Lieberman
  writing forward and my writing legislation,
  Savings for Working Families Act.

10
Lie Enough Times The Case of Payday Loans

• Payday Loan Industry argues that it is not fair
  to annualize their fees using APR because most
  payday advances are for a month or less, many for
  14 days or fewer
• Argument goes that payday loans are one of the
  few accessible sources of very short-term,
  occasional credit for hard-pressed consumers and
  are not intended to be a source of longer-term
  credit, so APR is not fair way of assessing the
  reasonableness of the industrys charges.
• You could take a taxi from Raleigh to Cary (about
  2 mile ride) or you could take the same taxi from
  Raleigh to Seattle for exactly the same rate, but
  total cost would be ridiculous. It would be much
  cheaper to fly. It would be silly for a cash
  advance customer to take a single cash advance
  for an entire year.
• NC fee structure 15 per 100, maximum term 31
  days
• In NC, median payday loan fee of 36 for median
  loan of 244 in 2000 translates to a median APR
  of 419. For a seven day loan, same parameters
  produce a 920 APR
• Truth 18 of customers take out 13 loans/yr
  accounting for 38 of total revenues
• Business model depends on rollovers renewals
  payday loans are a longer term source of credit
  than industry would have you believe.