Predatory Lending: The Problem and the Plea

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Predatory LendingThe Problem and the Plea

• Virginia Partnership to Encourage Responsible
  Lending

Helen OBeirne, Responsible Lending Coordinator
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Predatory Lending - A Moral Issue

• Target
• Low-income workers
• Minorities and immigrants
• Women, single mothers receiving benefits
• Elderly
• Military families
• College students
• Attributes young or very old, desperate,
  clustered, unbanked, financially immature

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Signs of Predation

• Triple Digit Interest Rates (300 1000)
• Collecting Interest From the Loan Proceeds
• No Refund For Early Pay Back
• Single Balloon Payment
• Short Term Loan Typically 14 days
• Personal Check as Collateral
• No Consideration of Ability to Repay
• Loans are Flipped, Rolled or Refinanced
• Simultaneous Borrowing from Multiple Lenders
• Mandatory Arbitration Clause
• Source Center for Responsible Lending
  http//www.responsiblelending.org

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Triple Digit Interest Rates

• Payday Loans 380 to 790 APR
• Car Title Loans 360 APR
• Loansharking 150 to 250 APR
• Pawnshops 18 to 300 APR

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Payday Loan Contract
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• Usury laws have existed for hundreds of years
• Protect the Needy from the Greedy
• Bans the charge of interest to the poor.
• Exodus 2225
• "He who increases his wealth by excessive
  interest gathers it for one who has pity on the
  poor."
• Proverbs 288

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Single Balloon Payment

• Full amount DUE at end of loan term
• Installment or partial payments are prohibited
• Have you ever taken out a loan that you had to
  pay back in one fell swoop?
• What is the likelihood that a traditional fringe
  borrower can repay all at once?
• DEBT TRAP

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• Predatory loans are set up so you have to pay
  the whole thing off in two weeks, and they know
  you cant.
• Its bad enough that the interest rates are 380
  percent, the worst part is that they trap you.
• Jay Speer, Executive Director Virginia Poverty
• Law Center

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Loans are Flipped, Rolled or Refinanced

• Typical borrower lives from payday to payday and
  come up short when loan is due
• To avoid default (and have their check presented
  for payment) the borrower
• Flips, rolls or refinances the loan by paying
  interest again, and again, and again, and again
• DEBT TRAP

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• Thats the Dirty Little Secret
• Payday lending is structured so you just pay the
  interest every two weeks. They never want you to
  pay back the principal.
• John Oxendine, Georgia Insurance Commissioner

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Simultaneous Borrowing from Multiple Lenders

• Borrowing from Peter to pay Paul!
• Exorbitant interest payments eats into borrowers
  paycheck
• After a couple of touch n gos, borrower needs
  another loan to fill hole caused by first loans
  interest payments
• Can continue for months or years
• Some borrowers have upwards of 13 outstanding
  loans

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Forms of Predatory Lending

• Payday Loans
• Car title loans
• Predatory mortgage lending
• Rent-to-own stores
• Refund anticipation loans
• Buy here, pay here auto dealers
• Pawn shops

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Payday Lending The Problem

• Bad check as collateral for up to 500
• 15 fee for every 100 loaned
• Average loan is 300
• Average term is 2 weeks
• 45 every 2 weeks in INTEREST
• in 3 months (6 pay periods), already paid back
  amount over the original loan!
• BUT NO PRINCIPAL
• DEBT TRAP

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Payday Loan Tracker
Date Interest Paid
Oct 1 45
Oct 15 90
Nov 1 135
Nov 15 180
Dec 1 225
Dec 15 270
Jan 1 315
Original Loan 300
Remaining Principal 300
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Payday Lending Other Problems

• Hold checking account hostage
• Collection practices
• Threat of lawsuit
• Shame

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How Did This Happen?

• Payday Loan Act of 2002
• Loophole / exception / special exemption
• Can accept bad check
• Can charge exorbitant interest
• LEGITIMIZED AND LEGALIZED INDUSTRY

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Payday Statistics
12/31/2002 12/31/2003 12/31/2004 12/31/05 6/6/2006
Total number of locations 377 596 696 756 776
Increase from previous year 58 17 9 3
Total dollar amount of payday loans made 165,659,916 655,645,430 988,135,464 1,197,105,829
Increase from previous year 296 51 21
Total number of individuals to whom payday loans were made 124,362 285,798 387,696 445,891
Increase from previous year 130 36 15
Number of individuals who received 13 loans or more 50,928 76,068 90,859
Increase from previous year 49 19
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Payday Lenders in Tidewater
Locality Payday Lending Storefronts
Virginia Beach 69
Norfolk 45
Newport News 40
Chesapeake 30
Portsmouth 28
Hampton 27
Source Bureau of Financial Institutions
licensed payday lenders as of 8/06.
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• Other lenders get word of lenient restrictions
  for payday loans in Virginia (industry friendly
  state)
• Realize they could make a buck, too!

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Car Title Lending The Problem

• Payday lendings little brother
• 25 fee up front tacked onto principal
• 25 fee per month 360 APR
• ON A SECURED LOAN
• (they have title and extra set of keys)
• Repossession loss of vital asset

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How Did This Happen

• Loophole motor vehicle equity line of credit
• No caps on open-ended loans (meant for credit
  cards)
• All other small loans capped at 36 APR via the
  Consumer Finance Act
• Industry hoping to be regulated NEXT PAYDAY
  LENDING CRISIS

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Car Title Statistics

• Currently unregulated
• Estimated 150 locations
• Could be us Tennessee passed car title
  authorizing legislation and there are now over
  900 car title lenders in Tennessee. In 2004,
  Tennessee car title lenders repossessed 17,313
  cars.
• Three lawsuits settled secretly

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Stories

• Ms. C is 58, disabled, lives on a meager 1019
  per month in Social Security. She now has
  outstanding payday loans with 5 companies and
  pays 400 a month just to keep them afloat. Every
  two weeks, she renews one to pay another. Ms. C
  finds it takes almost an entire day to visit each
  lender with a modest payment. A payday collector
  yesterday told her on the phone that someone who
  didn't pay ended up downtown in jail. Ms. C is
  terrified that she will spend the last years of
  her life behind bars.

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Stories

• A recent client (VPLC) was discovered to have 5
  outstanding loans one for 500, another for
  345, another for 230 and 2 for 115 each. She
  gets a monthly social security check of 626.
  She borrowed money because she was temporarily
  taking care of her granddaughter and needed money
  for the related expenses.

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Stories

• Janet Ruiz borrowed 2,950 in February, 2005 and
  was charged a cash advance fee of 737.50. Her
  monthly payments (interest only) were 1,106.25.
  By the end of the year, she owed more than
  12,500. By April, 2006, her debt hit 16,000.

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Stories - Stress

• I have been a nervous wreck for 2 days and have
  cried my eyes out.  The thoughts of going to
  jail--almost made me suicidal thinking if I was
  dead  my daughter could draw my social security. 
  This threat was a real threat to my entire life
  you see. Please don't think I am suicidal--but it
  made me think what if someone that was not stable
  was in this situation thinking they would go to
  jail?  Somebody else might go through with it.

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VaPERL

• Virginia Partnership to Encourage Responsible
  Lending member organizations include
• AARP, Virginia Poverty Law Center, Virginia
  Interfaith Center for Public Policy, Housing
  Opportunities Made Equal, Richmond Better
  Business Bureau, CHIP of Virginia, Legal Aid
  Justice Center, Virginia Organizing Project,
  Virginia Citizens Consumer Council, NAACP
  Virginia State Conference, Piedmont Housing
  Alliance, Virginia Muslim Coalition for Public
  Affairs, Peninsula Community Development
  Corporation, New River Community Action, Greene
  County Alliance of Church and Community Efforts
  (GRACE), Virginia Area Agencies on Aging (V4A),
  Voices for Virginias Children, Tidewater Sowers
  of Justice, and others.

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VaPERL at the GA The Plea

• Repeal the Payday Loan Act of 2002
• Delegate OBannons HB 619
• Undo special exception for industry
• Avoid passing loose reforms (HB 1621)
• Cap car title loan APRs at 36
• Delegate Morgans HB 325
• Close loophole to open-ended credit
• Avoid codifying current practice (HB 1514)

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Challenges

• They say
• Legitimate need fulfilled
• No alternatives
• Personal responsibility
• Lost revenue
• Free market
• Compromise
• Reforms not repeal

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Countdown to Dec 5th

• House Commerce Labor Committee will vote on HB
  619 HB 325
• Call, write, and email your legislators and
  members of the CL Committee NOW!
• Delegates in your area Alexander, Purkey, Suit,
  Joannou, Melvin, Morgan, Tata
• Join VaPERL listserv for more information
  www.VirginiaFairLoans.org

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• Payday lending is like any other vice its
  instant gratification, but its a bad deal over
  the long term. There are not adequate
  limitations to protect against gross abuse.
  People in financial crisis need financial
  counseling, not a quick fix. Not a loan that is
  financial cocaine.
• Bill Whalen, Senior Staff Attorney, Pisgah
  Legal Services, Ashville, N.C.

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• THANK YOU FOR YOUR ATTENTION AND INTEREST
• (the good kind)!
• ANY QUESTIONS?