The High Cost of Being Poor:

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  • 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: (918) 382-3213 publicpolicy @captc.org www.captc.org/public-policy.asp
  • 2.
    • 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
        • Lending Law
        • The Size of the Problem in Oklahoma
        • Oklahoma’s 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 – Oklahoma’s “Deferred Deposit Lending Act” and its Weaknesses
    Presentation Overview
  • 3.
    • 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
  • 4.
    • 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
  • 5.
    • 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
    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
    • Mandatory arbitration
    • Loans for well over 100% of a home’s value
  • 6.
    • 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
    Background on Regulation of Predatory Mortgage Lending
  • 7.
    • 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
  • 8. 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.
  • 9.
    • 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
  • 10.
    • 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).
    Payday Lending
  • 11.
    • 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
  • 12.
    • 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
  • 13.
    • 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
  • 14.
    • 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
  • 15.
    • CAP’s Public Policy Page
    • www.captc.org/public-policy.asp
    • For specific questions, you may also contact CAP at (918) 382-3254 or at publicpolicy @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
    For Additional Information