State of Lending Release Slideshow

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Presentation from the release of the State of Lending in America, 2012

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  • Thanks again to Sheila Bair, Bonnie and the CRL Board. I also want to thank and congratulate my co-authors on this project, especially the project director Sonia Garrison who unfortunately is under the weather a couldn’t be with us today. The State of Lending in America and its Impact on U.S. Households tells the story of the financial products that households use to handle everyday transactions, acquire major assets, and provide financial security for themselves and for their children. The report, which covers the decade of CRL’s existence, describes how predatory lending practices have sometimes corrupted traditional financial products and undermined the benefits of these products are intended to provide. The overview of that I will provide this afternoon is just that – an overview of an 119 page (and counting) report with a wealth of additional interactive maps and other material that you’ll find on the website. At registration, you received a flash drive with the full report with a link on the cover of the PDF to all of the State of Lending web content.
  • I say 119 pages and counting because we are releasing today the first of three volumes in the State of Lending series. This first volume tell the story of the stagnant incomes, increasing expenses, declining assets, and persistent debt that American households have faced over the past decade. It also documents past and current lending abuses in mortgages, auto loans, credit cards, and student loans and the impact of these abuses on American families. The second volume will cover debt trap lending in the form of payday loans by banks and non-bank finance companies, car title loans, and overdraft fees. The third and final volume will cover servicing and debt collection abuses and will conclude with a chapter that quantified how predatory lending practices have a cumulative impact on low-income households and communities of color.
  • When we take a look at the financial circumstances of households at the beginning and end of the last decade, some clear trends emerge. One of the most important of these trends is that debts jumped substantially in the first half of the decade and have remained high, but there are some shifts in the types of debt. The largest source (in dollars) of the increases in debt at the beginning of the decade was mortgage debt, which has remained high despite a precipitous decline in home values during the housing meltdown and subsequent recession. Similarly, the biggest increase (in the percent of households that hold a particular type of debt) has come from student loans. On the other hand, we also see clear evidence that households have reduced credit card and auto loan debt by delaying auto purchases and otherwise cutting expenditures where possible. These reduction are a big reason that the rapid debt growth between 2001 to 2007 has cooled in recent years, but risky practices, such as dealer mark-ups, in auto lending represent considerable risk to households.
  • These debt levels matter not just to individual households, but to the national and global economy. Much has been written about how increasingly dependent our economy has become on spending on goods and services. Predatory practices siphon fees and excessive interest payments that would otherwise go to into consumer spending and would, thus, contribute to a more rapid recover.
  • The Household Balance Sheet section of the State of Lending documents just how tight finances are for the typical American household. In the report, we show how a household in the middle income quintile has just over $100 left each month after accounting for basic expenses and debt payments. While enough to cover basic expenses, it’s not nearly enough to cover a medical or other emergency, to save for a down payment for a home or auto purchase, or to contribute adequately to college or retirement savings.
  • One of the big reasons for the tight household finances is that declining wages have been paired with increases in the basic expenses most important to families (medical care, housing, education, food). And a particular insult to American workers is that these wage declines have occurred during a period on double-digit growth in worker productivity.
  • Perhaps the most dramatic change in household finances is the rapid decline in household assets, driven by the decline in financial assets that began at the beginning of the decade, paired with rapid loss in home values at the end of the decade
  • The drop in assets has been well documented in reports by Pew in others, who have shown how the wealth gap between African American and Hispanic households and their white counterparts is at historically high levels.
  • I will now provide a glimpse into what you’ll find in the chapters on particular products.
  • Foreclosures have affected borrowers of all races and incomes, but the crisis has disproportionately affected borrowers of color. 11% of African–American borrowers and 14% of Latino borrowers have already lost their home to foreclosure – that’s compared to 8% of Asian borrowers and 6% of non–Hispanic whites. This disparity reflects that African–American and Latino borrowers were targeted by subprime lenders and were more likely to receive riskier loan products than white borrowers. These metrics, first presented in our 2011 paper Lost Ground paper, have been updated in the paper with 2012 performance data.
  • Unfortunately, foreclosure costs extend beyond the individual families losing their homes. Foreclosures decrease the values of surrounding properties, causing losses of wealth for neighboring families. We estimate that $1.95 trillion in home equity has been lost to property owners who happen to live near foreclosed homes. Our full report also includes state-by-state “spillover” cost and a breakout of the impact on neighborhood of color.
  • Unlike mortgages lending, where federal regulation has eliminated the vast majority of the risky loan practices that created the housing crisis, the practices in auto lending remain a particular concern.
  • These risky practices include dealer mark-up, where dealers make $25B each year offering consumers higher rates than consumers are eligible based on credit standards. The report also quantifies the impact of other auto loan abuses – namely yoyo scams and loan packing – that can cost consumers as much as $15K over the repayment period on a $26K loan.
  • The story the report tells about credit cards is largemly one of successful federal oversigh, as the Credit Card Act eliminated many of the tricks and traps –m such as universal default – that plagued consumers prior to the implementation of the act. And this increase in transparency and protection has come without evidence of any increased cost to consumers.
  • Back in 2001, roughly 1 in 8 household had student loan debt. By 2010, it was 1 in 5. This growth in debt represents a substantial burden to young adults and families.
  • One of the big concerns addressed in this chapter has to do with private student loans. This chart shows an example of what a borrower in a lower credit tier might pay monthly on a private loan (in red) compared to what they would pay on Stafford loan (in green).  In addition to the increased monthly cost,most private loans do not offer the flexible repayment options that are available on federal loans. It becomes harder for borrowers facing financial difficulties to work out a payment solution and prevent default. Moreover, unlike all other unsecured non-governmental loans, private student loans are not dischargeable in a bankruptcy. This lack of repayment options for private loan borrowers make it very difficult for student borrowers to recover from economic hardship such as unemployment or underemployment.  
  • Mike will talk more directly about the policy challenges and opportunities that the current state of lending presents, but I will note strong protections against predatory lending practices as well as access to safe and affordable credit are two of the keys to household balance sheets.
  • State of Lending Release Slideshow

    1. 1. www.responsiblelending.org #Stateof
    2. 2. The State of Lending in America and its Impact on U.S. Households(http://responsiblelending.org/state-of-lending)Report Release & 10th Anniversary Celebration Authors: Debbie Bocian, Delvin Davis, Sonia Garrison, and M William Sermons December 13, 2012
    3. 3. Overview Volume 2 Volume 3 Volume 1 March 2013 Release June 2013 ReleaseHousehold Balance Debt Trap Lending Abuses in DebtSheet • Payday Loans Collection • Car Title Loans • Servicing and • Overdraft Fees Collections onAbuses in Traditional Mortgages & • Bank Payday LoansLending Products Student Loans • Mortgages • Debt Settlement • Auto Loans • Debt Buyers & Zombie Debt • Credit Cards • Student Loans Cumulative Impact on Low-Income Households and Communities of Color
    4. 4. Debt persists at high levels, but types of debt have changedIncreases primarily in mortgages and student loans, withlower credit card balances and auto loans Debt Holding and Median Value (2010 $s), Any Debt % Families Holding Debt 100% $80,000 90% $70,000 Median Value 80% $60,000 70% 60% $50,000 50% $40,000 40% $30,000 30% $20,000 20% 10% $10,000 0% $0 2001 2004 2007 2010 % Families 75.1% 76.4% 77.0% 74.9% Value $47,700 $63,800 $70,600 $70,700 Source: 2010 Survey of Consumer Finances Chartbook
    5. 5. Strong consumer financial status is important for U.S. economyConsumer spending is key element of US economic activity Annual GDP, Current Year and Real Dollars Consumer Expenditures as a $16,000 Percent of U.S. GDP $14,000 (average annual share) $12,000 1961-1970 61.8% GDP ($Billion) $10,000 $8,000 1971-1980 62.5% $6,000 $4,000 1981-1990 64.6% $2,000 1991-2000 67.3% $0 1970 1980 1990 2000 2010 2001-2010 70.0% Annual GDP, Current Year Annual GDP, Inflation Adjusted Source: CRL Tabulations of Bureau of Economic Analysis data SOURCE: Organisation for Economic Co-operation and Development.
    6. 6. Many American families have little financial breathing roomTypical household has just $100 left each month, aftercovering basic expenses, debt payments, etc. Item Value ($) Yearly Income (less taxes and insurance/pension $ 41,516 contributions) Annual non–discretionary expenses $ (37,651) Housing (including upkeep and operation) (11,455) Transportation (7,160) Food (5,596) Utilities (3,603) Health Care (3,068) Education (including reading) (594) Other expenses (excluding alcohol, tobacco, (6,175) entertainment) Annual debt payments (excluding mortgage and auto) $ 2,658 Discretionary annual income $ 1,207
    7. 7. Increasing non-discretionary expenses and incomes declineNon-discretionary expenses grew faster thaninflation as incomes declined Increase in Nominal Household Spending Real Income80% $60,00070% $50,00060%50% $40,00040% $30,00030%20% $20,00010% $10,000 0% $- 2000 2002 2004 2006 2008 2010 Median Income; $ 2010 Black Households Hispanic Households Source: Consumer Expenditure Survey, U.S. Bureau of Labor Statistics Source: Current Population Survey, U.S. Census Bureau
    8. 8. Predatory lending contributed to recession- depleted assetsValues dropped for both household financial assets and homes- $7 trillion drop in home equity alone Asset Holding and Median Value ($2010), Asset Holding and Median Value ($2010), Financial Assets Home Values % Families Holding Asset 100% $40,000 100% $250,000 % Families Holding Asset 80% 80% $200,000 Median Value $30,000 60% Median Value 60% $150,000 $20,000 40% 40% $100,000 $10,000 20% $50,000 20% 0% $0 0% $0 2001 2004 2007 2010 2001 2004 2007 2010 % Families 67.7% 69.1% 68.6% 67.3% % of Families 93.4% 93.8% 93.9% 94.0% Value $151,300 $184,700 $209,500 $170,000 Value $34,400 $26,600 $30,200 $21,500 Source: 2010 Survey of Consumer Finances Chartbook Source: 2010 Survey of Consumer Finances Chartbook
    9. 9. Household wealth now down to pre-1995 levels• 40% drop from 2007-2010• Wider wealth disparity between white and African–American or Hispanic households Median family net worth by race/ethnicity, 2010 $s $150,000 $100,000 $50,000 $- 1995 1998 2001 2004 2007 2010 All Families Non-white or Hispanic Source: 2010 Survey of Consumer Finances Chartbook
    10. 10. State of Lending in America and its Impact on U.S. Households• Household Balance Sheet• Mortgages• Auto Loans• Credit Cards• Student Loans
    11. 11. Updated metrics documenting disparate Impact of the Foreclosure Epidemic Rates of Completed Foreclosures and Serious Delinquencies by Race/Ethnicity (2004 – 2008 Originations)30.0%25.0%20.0%15.0%10.0% 5.0% 0.0% Asian African-American Latino NH White Others Completed Forclosures Seriously Delinquent
    12. 12. “Spillover” Costs of ForeclosureCRL’s estimate of the spillover costs: nearly $2 trillion.Disproportionate impact in neighborhoods of color
    13. 13. State of Lending in America and its Impact on U.S. Households• Household Balance Sheet• Mortgages• Auto Loans• Credit Cards• Student Loans
    14. 14. Dealer Interest Rate Markups• Dealers have incentive to inflate the loan interest rate to increase their commission.• Markups cost US consumers $25.8 billion each year.• Rate markups are correlated with • Loans from subprime auto lenders • Higher odds of default and repossession
    15. 15. State of Lending in America and its Impact on U.S. Households• Household Balance Sheet• Mortgages• Auto Loans• Credit Cards• Student Loans
    16. 16. U.S. Total Outstanding Credit Card Debt
    17. 17. State of Lending in America and its Impact on U.S. Households• Household Balance Sheet• Mortgages• Auto Loans• Credit Cards• Student Loans
    18. 18. Private Loans are More Expensive Monthly Payment Comparison for Student Loan Borrowers With Lower Credit Scores: Federal Stafford vs. Private loans $450 $450 $400 $348 $350 $300 $268 $250 $229 $200 $150 $100 $50 $0 3.4% Subsidized fixed rate 6.8% Unsubsidized fixed 13% Private loan adjustable 20% Private loan adjustable Stafford rate Stafford rate rate40% of students taking out private loans did not take outall the lower-cost federal loans they were eligible for first
    19. 19. Keys to rebuilding household balance sheets• Promote access to safe and affordable credit• Provide strong protections to prevent predatory lending practicesCRL’s State of Lending report offers our perspective on how toachieve these.
    20. 20. Questions?All State of Lending Resources:http://www.responsiblelending.org/research-analysis.htmlSee all CRL research:http://www.responsiblelending.org/research-analysis.htmlContact us: Bill Sermons (DC): 202-349-1851 Kathleen Day (DC): 202-349-1871
    21. 21. www.responsiblelending.org #Stateof

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