The High Cost of Being Poor: Presentation Transcript
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: (918) 382-3213 publicpolicy @captc.org www.captc.org/public-policy.asp
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 Carolina’s Anti-Predatory
The Size of the Problem in Oklahoma
Oklahoma’s Legislative Response (HB 1574) and its Weaknesses
The Dangers of Payday Lending
Data on How Payday Lending Leads to “Treadmills of Debt”
SB 583 – Oklahoma’s “Deferred Deposit Lending Act” and its Weaknesses
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
The High Cost of Being Poor
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.
Predatory Mortgage Lending
What are some examples of predatory mortgage lending
Excessively high costs
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
Predatory Mortgage Lending 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.
Single premium credit life insurance
Loans for well over 100% of a home’s value
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.
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
Background on Regulation of Predatory Mortgage Lending
Study by UNC titled “The Impact of North Carolina’s 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.
Effects of State Efforts
The Size of the Problem in Oklahoma Source: Based on Standard & Poor’s, 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.
Over 20,000 loans were issued in Oklahoma between 2000-2001 that contained one or more predatory elements.
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.
Oklahoma’s Legislative Response
What are Payday Loans?
Pay day loans are high interest, short term loans backed by a borrower’s personal check . Since t he 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).
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.
Payday Lending: A Treadmill of Debt Source: The Woodstock Institute, using data gathered by the Illinois Department of Financial Institutions for 1999. 35% 16 or more 17% 11-15 30% 4-10 18% 1-3 Percentage of Borrowers Total Number of Loans Taken in One Year
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.
SB 583 – Deferred Deposit Lending Act
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
SB 583’s Weaknesses
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 borrower’s legal rights.
How SB 583 Can Be Strengthened
CAP’s Public Policy Page
For specific questions, you may also contact CAP at (918) 382-3254 or at publicpolicy @captc.org
Oklahoma Coalition for Consumer Advocates (OCCA)
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